When recording prepaid expenses, which account is affected on the Balance Sheet?

The correct answer, Prepaid Expenses, is a key component of the Balance Sheet because it represents future economic benefits that a business has already paid for but has not yet consumed or utilized. When a business pays for items such as insurance or rent in advance, it initially records these payments as prepaid expenses. This practice aligns with the accrual basis of accounting, which recognizes expenses when they are incurred, not necessarily when cash is paid.

On the Balance Sheet, prepaid expenses are classified as current assets, as they are expected to be utilized within one year. Over time, as the benefits of these prepaid expenses are realized (for example, through the passage of time or usage of services), they are subsequently recognized as expenses on the income statement, reducing the prepaid expenses account and increasing the expense account appropriately.

The other accounts listed do not play a direct role in the recording of prepaid expenses. Cash would be affected in the initial transaction when the payment is made, and Accounts Payable would only be relevant if the expense were incurred on credit. Accumulated Depreciation relates to the reduction in value of tangible fixed assets over time, not prepaid expenses. Thus, Prepaid Expenses is the correct answer as it directly impacts the Balance Sheet by reflecting an asset that