Answer:
c. Prepaid Expense
Explanation:
A counterbalancing error happens when one accounting mistake cancels out another accounting mistake. For example, a prepaid expense is not recorded properly:
January 1, 2020, prepaid rent for the year:
Dr Rent expense 12,000
Cr Cash 12,000
The correct journal entry should have been:
Dr Rent expense 1,000
Dr Prepaid rent 11,000
Cr Cash 12,000
But at the end of the year, the prepaid rent account should be adjusted:
December 31, 2020, adjustment to prepaid rent account
Dr Rent expense 11,000
Cr Prepaid rent 11,000
Even though an accounting mistake existed, it was eventually a self correcting error.
