(L.O. 5) In reviewing some adjusting entries, you observe an entry which contains a debit to Prepaid Insurance and a credit to Insurance Expense. The purpose of this journal entry is to record a(n):

a. accrued expense.

b. deferred expense.

c. expired cost.

d. prepaid revenue.

Approach and Explanation: Write down the entry so you can see what the entry does. Notice the entry records a prepaid expense (an asset). Then examine each answer selection one at a time. A debit to Prepaid Insurance records an increase in a prepaid expense. A prepaid expense is an expense that has been paid but has not been incurred. Another name for a prepaid expense is deferred expense. A deferred expense is an expense whose recognition is being deferred (put off) until a future period. An accrued expense is an expense incurred, but not paid. An expired cost is an expense or a loss. Prepaid revenue is a bad term for unearned revenue (or deferred revenue). (Solution = b.)