Given a rent of $1,000 per month paid for three months in advance at the beginning of December, what adjustment must be made on December 31 if Rent Expense shows $3,000?

In this situation, the rent payment of $1,000 per month for three months in advance results in a total prepaid rent of $3,000 at the beginning of December. By December 31, one month of that prepaid rent has been incurred as an expense, meaning that $1,000 should have been recognized as Rent Expense.

Since the Rent Expense account currently shows a balance of $3,000, this reflects the total amount of prepaid rent that has been charged as an expense but includes amounts that should not have been recognized yet. To correctly align the Rent Expense with the incurred amount, an adjustment is needed.

The necessary adjustment involves reducing the Rent Expense balance to reflect only the rent for one month that has been incurred, which requires acknowledging that $2,000 of the Rent Expense recorded should not have been recorded yet because it relates to future months. Therefore, by crediting Rent Expense for $2,000, you appropriately align it with the actual expense incurred for December, and the excess amount will remain in the Prepaid Rent account, which accounts for January and February rent.

This adjustment ensures accurate financial reporting by matching expenses to the period they relate to, which is fundamental in accounting practices to adhere to the matching principle.