A prepaid expense (such as supplies or prepaid rent) can initially be recorded as either an expense or as an asset. Demonstrate your understanding of adjusting for prepaid expenses by selecting the statement that is correct. Multiple choice question. If prepaid expense was initially recorded as an asset, then net income will be lower. No matter how a prepaid expense was initially recorded, after adjustment, the financial statements will be identical. If prepaid expense was initially recorded as an asset, then assets will be higher on the balance sheet. If a prepaid expense was initially recorded as an expense, then expenses will be higher on the income statement.