If A Company Fails To Adjust A Prepaid Expense Account

What happens if a company failed to adjust a Prepaid Expense is answered in this blog post.

Actually, when a company forgets to make an Adjustment of a prepaid expense, then assets are overstated / increased on balance sheet / statement of financial position, which increased total assets in balance sheet, and expenses in Income Statement or Profit And Loss Account are understated which overstates the Net Income or Net Profit.

 

The adjusting entry to record a prepaid expense is shown below:

 

                                                 Expense a/c  XXX

 

                                                                     Prepaid Expense a/c  XXX

 

                                                 (Expense Expired for the Period)

 

Expenses are debited as these are expired and the portion of expired expense is deducted from prepaid expense in order to calculate the portion of unexpired expense which is transferred to prepaid expense account in the next accounting period. Expense is not recorded in Income Statement, so expenses are less deducted from revenues to calculate net income, which as result has been overstated.