What is the difference between a prepaid expense and an accrued expense?

• A. Prepaid expense is cash paid before benefit; adjusting entry records the expense. Accrued expense is incurred but not yet paid; adjusting entry records the expense and a payable.
• B. Prepaid expense increases liabilities; accrued expense decreases assets
• C. Prepaid expense is always an asset; accrued expense is always a revenue
• D. Prepaid expense is never adjusted; accrued expense decreases cash immediately

Answer: (A)

The main idea is how timing affects recognition and the related accounts. A prepaid expense is cash paid before you receive the benefit, so it sits on the balance sheet as an asset. When the period passes and you actually use part of that benefit, you adjust by shifting the appropriate amount from the asset to an expense (debit expense, credit the asset), recognizing the cost in the period benefited.

An accrued expense is an expense that has been incurred but not yet paid, so you owe a liability. The adjusting entry records the expense and creates a payable (debit expense, credit a liability).

This matches the description in the correct choice: prepaid expense involves cash paid before benefit and requires adjusting to record the expense while reducing the asset; accrued expense involves incurring the cost but not yet paying, and requires adjusting to record the expense and a payable. The other statements misstate the accounts involved or the timing of the adjustment.