State BPA Fundamental Accounting Practice Exam

Which of the following is an example of an asset account?

1. Accounts Payable

2. Prepaid Rent

3. Common Stock

4. Wages Expense

The correct answer is: Prepaid Rent

Prepaid Rent is indeed an example of an asset account. In accounting, asset accounts represent resources owned by a business that are expected to provide future economic benefits. Prepaid Rent specifically refers to rent that has been paid in advance, which means that the company has already made a payment for a service (the use of property) that it will receive in the future. This prepaid amount is recorded as an asset on the balance sheet because it represents a future benefit that the company will enjoy over time as it occupies the rented space. Understanding how prepaid expenses work is crucial. Initially, they are recorded as assets, and as time passes and the rent period elapses, they are gradually expensed on the income statement. This transition reflects the consumption of the prepaid service. In summary, prepaid rent is recognized as an asset because it signifies a payment for a service that will be received in the future.