Final answer:
The adjusting entry for a prepaid expense involves a debit to the expense account and a credit to the prepaid expense account, reflecting the expense recognition as its benefit is used.
Step-by-step explanation:
The adjusting entry for a prepaid expense typically includes a debit to an expense account and a credit to a prepaid expense (or asset) account.
When a company prepays for an expense, it records the payment in a prepaid expense asset account on the balance sheet. As the benefit of the prepaid expense is used or expires with time, the company must recognize the portion of the expense in the period it relates to. The adjusting entry moves the expired portion from the prepaid expense account to the appropriate expense account.
For example, if a business pays in advance for a 12-month insurance policy, each month, it would recognize one month's worth of insurance expense. The adjusting entry would debit the Insurance Expense account, increasing the expense on the income statement, and credit the Prepaid Insurance account, reducing the prepaid asset on the balance sheet.