Question

Which of the following statements is not true regarding prepaid expenses?

a. Prepaid expenses represent assets.
b. Prepaid expenses are shown in a special section of the income statement.
c. Prepaid expenses become expenses only as goods or services are used up.
d. Prepaid expenses appear on the balance sheet.

Answer 1

Prepaid expenses are an asset and appear on the balance sheet, not in a special section of the income statement. They become expenses as the goods or services are used up.

Step-by-step explanation:

The statement that is not true regarding prepaid expenses is b. Prepaid expenses are shown in a special section of the income statement. Prepaid expenses do indeed represent assets, as they are services or goods that have been paid for in advance and will provide future economic benefit. They become actual expenses through a process called expense recognition, which happens as the goods or services are used or consumed over time. This process is guided by the matching principle, which aims to match expenses with related revenues in the period in which they occur. Thus, prepaid expenses are initially recorded on the balance sheet and are then allocated as expenses on the income statement over the period of their use.