In the case of a prepaid expense, the adjusting entry required at the end of a period will consist of a credit to the Prepaid Expense account. Assume the prepaid expense was initially recorded as an asset.

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A prepaid expense is initially recorded as an asset because it represents an amount that has been paid but has not yet been used up or consumed. At the end of the period, an adjusting entry is made to recognize the portion of the prepaid expense that has been used or consumed as an expense. This adjusting entry will typically include a credit to the Prepaid Expense account to reduce the balance to the portion that has not yet been used.

In the Case of a Prepaid Expense, the Adjusting Entry