Accrual Adjustment for Prepaid Expenses

Steps:

• Sam paid advertising expenses including amounts for the next financial year.
• Without adjustment, all payments reduce current-year profit as expenses.
• Adjustment reclassifies future-period portions as prepaid expenses (current assets).
• This lowers current-year expenses, increasing profit for the year.

Why B is correct:

• Under accrual accounting, deferring expenses for future periods reduces current-year expense recognition, directly increasing profit via the matching principle.

Why the others are wrong:

• A: Adjustment decreases expenses, so profit increases, not decreases.
• C: Prepaid expenses increase current assets, but the primary effect is on profit.
• D: No new liabilities created; adjustment affects assets and expenses only.

Final answer: B