What is the adjusting journal entry for DEF Co. after one year has passed?

To understand why the correct answer is the adjusting journal entry for DEF Co. after one year has passed, it’s important to grasp the concept of adjusting entries, especially concerning prepaid expenses like insurance.

In this scenario, DEF Co. would initially record the prepaid insurance as an asset when the payment was made. This is because, at the point of payment, the company receives the right to insurance coverage over a future period, which is classified as an asset on the balance sheet.

As time passes and the coverage is utilized, adjusting entries are necessary to recognize the expense that corresponds to the insurance used in the period. The correct entry shifts the amount of the prepaid insurance asset to expense, reflecting that benefit provided by the insurance over the year. This is accomplished by debiting Insurance Expense and crediting Prepaid Insurance.

Thus, the correct answer captures the essence of this transaction: it accurately reflects the decrease in the asset (Prepaid Insurance) and the simultaneous increase in the expense (Insurance Expense), ensuring the financial records match the actual usage of the insurance over the period. This helps stakeholders understand the company's expenses appropriately and maintains compliance with accrual accounting principles, which require revenues and expenses to be recorded in the period they are incurred.

The other options do