Studying Bookkeeping

by Danette

Failure to record the used portion of prepaid rent during the month has the following effect on the financial statements prepared at month's end:

a. Overstate Liabilities
b. Overstate Net Income
c. Understate Assets
d. Understate Owners Equity

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Hello Danette,

It looks like you are a student studying bookkeeping or accounting.

To find the answer to this question, think about what effect a prepaid transaction has on the different elements of the income statement and balance sheet.

For example start with what elements are affected so you can rule out the ones not involved.

Prepaid rent is a current asset on the balance sheet.

Rent expense is an expense on the income statement ... which affects net income (loss) ... which affects equity on the balance sheet.

That rules out one of your four choices.

Once you've determined the elements affected, figure out what makes each one increase or decrease. Once you've figured that out, your answer should pop out at you.

It's important to learn to think your way through transaction. ;0)

If debits and credits confuse you ... they certainly confused me when I started learning about them ... my "cheat" table might help you out.

Good luck with your studying!

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