An adjusting entry that increases an expense on the income statement and decreases an asset on the statement of financial position is the result of prepaid expenses that expire with the passage of time.

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Prepaid expenses are assets that represent the payment of expenses in advance. As time passes, the portion of the prepaid expense that has been used up becomes an expense on the income statement, while the remaining portion continues to be recorded as an asset on the statement of financial position. Therefore, an adjusting entry that increases an expense and decreases an asset is a result of prepaid expenses that expire with time.

An Adjusting Entry That Increases an Expense on the Income