Accounting for Prepaid Rent Under Accrual Basis

Steps:

• Prepaying rent records the payment as Prepaid Rent (a current asset) instead of immediate expense.
• Cash decreases by the payment amount, but Prepaid Rent increases by the same, maintaining total current assets initially.
• At year-end, adjust by expensing only the used portion (debit Rent Expense, credit Prepaid Rent).
• Result: Unexpired prepaid remains a current asset, and total rent expense reflects only consumption, not full payment.

Why B is correct:

• Prepaid rent increases current assets via the asset account; rent expense decreases per matching principle, as costs are allocated to periods benefited, not fully expensed at payment.

Why the others are wrong:

• A: Current assets increase (not decrease) from the prepaid asset classification.
• C: Rent expense decreases (not no effect) due to deferred recognition of unused portion.
• D: Current assets increase (not no effect) from recording prepaid as an asset.

Final answer: B