What would happen if a company failed to adjust its Prepaid Rent account after the rent period?

If a company fails to adjust its Prepaid Rent account after the rent period, it will lead to the overstatement of assets and the understatement of expenses. Prepaid Rent is classified as an asset on the balance sheet, representing rent that has been paid in advance for future periods. When the rental period has passed, the corresponding amount in the Prepaid Rent account should be moved to the Rent Expense account to accurately reflect the use of the rented property in the current period.

By not making this adjustment, the asset (Prepaid Rent) remains on the balance sheet at an inflated value, as it no longer reflects the correct amount of prepaid expenses that are available for future use. This results in an overstated total for assets, as they include amounts that have already been consumed.

At the same time, failing to recognize the expense leads to understated expenses in the income statement. This means that the financial performance appears better than it actually is because expenses are reported lower than they should be. This misrepresentation can impact decision-making and financial analysis by giving a distorted view of profitability.

Therefore, the correct answer highlights the simultaneous impact on both the asset valuation and expense recognition, indicating that assets would be overstated while expenses would be understated.