Accounting for IGCSE & O level - Preparation Of Financial Statements (Section 12 - No. 47)
What is the effect of a prepaid expense on the accounting equation?
Increases assets and increases liabilities.
Increases assets and decreases liabilities.
Decreases assets and decreases liabilities.
No change in assets or liabilities.
Explanation
Prepaid expenses are an asset and the related expense reduces cash. Therefore, this will increase an asset (prepaid expenses) and either decrease an asset (cash) or reduce an expense.
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