Which of the following reflects the balances of prepayment accounts prior to adjustment?
A)Statement of financial position accounts are understated and statement of income accounts are understated.
B)Statement of financial position accounts are overstated and statement of income accounts are overstated.
C)Statement of financial position accounts are overstated and statement of income accounts are understated.
D)Statement of financial position accounts are understated and statement of income accounts are overstated.

Question

Quizplus · Accepted Answer

Prepayments are initially recorded as assets on the statement of financial position, leading to an overstatement if not adjusted. Since the expense has not yet been recognized in the statement of income, it results in an understatement of expenses.

Which of the Following Reflects the Balances of Prepayment Accounts