Question

On September 1, Year 1, Hales Company paid its rent in advance for the months of October, November, and December. On December 31, Year 1, Hales made the required adjustment to adjust its accounts. How does this year-end adjustment impact the amounts reported on the company’s financial statements?

Answer 1

Answer:

• It decreases an asset.

• It increases an expense.

Explanation:

Hales Company paid the rent for its facility in advance. This payment generated an expense that will interfere with the company's balance sheet, acting as an asset within the balance sheet. This interference will need to be readjusted later when the advance payments Hales Company has made are over, ie when the three months of advance payment have passed. Adjusting the company's balance sheet will decrease balance sheet assets, in this case being represented as advance rent, and will increase expenses, which in this case is money spent on rent. From this we can conclude that the company's year-end adjustment will show a decrease in assets and an increase in expenses.