If the accountant forgets to adjust the Prepaid Expenses account, there will be: A) an understatement of net income.
B) an overstatement of net income.
C) an overstatement of expense.
D) no under- or overstatement of net income.

Option B, an overstatement of net income, is the right answer.

Explanation:

Option “B” is correct because when the prepaid expenses occur then it is recorded in the balance sheet on the asset side and the cash will be reduced by the same amount. However, if the prepaid expenses have not been adjusted then it will show the overstatement of net income because cash has been gone so actual cash will be lower than the recoded cash. Thus, option B is right.

one of the appeals of a sole proprietorship is that business expenses are kept separate from your personal income tax return