[gggg34]

Which of the following is true when a company pays an expense before it has been incurred.
Choose one answer.
a. An asset should be recorded
b. The expense should be recognized because cash has been paid
c. The expense should be recognized evenly over the next year
d. Cash should be decreased and expenses should be increased

[Offeror]

Most companies follow the accrual method of accounting which means that expenses are recognized when they are incurred. The advance payment of an expense means that an asset is recorded at the time of payment. e.g Advance payment of rent would be recorded as follows:

Prepaid Rent (Current Asset) 100 (Dr.)
To Bank 100 (Cr.)
Later when the period to which the above rent pertains arrives the expense is recorded as follows:

Rent (Expense) 100 (Dr.)
To Prepaid Rent (Current Asset) 100 (Cr.)

In this way the expense is recognized only when it is incurred. Any advance payment of expense results in the recognition of a prepayment (current asset).

Hope this helps.

Offeror