Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Financial Accounting

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

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Multiple Choice

When preparing adjusting journal entries for prepaid expenses at the end of an accounting period, which of the following best describes the correct adjustment?

Debit an expense account and credit a revenue account

Debit an expense account and credit a prepaid asset account

Debit a prepaid asset account and credit an expense account

Debit a liability account and credit an expense account

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Verified step by step guidance

Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services that will be consumed in future accounting periods. At the end of the accounting period, an adjustment is required to recognize the portion of the prepaid expense that has been used or expired.

Identify the accounts involved: Prepaid expenses are recorded as assets when initially paid. As the prepaid expense is consumed, it becomes an expense. Therefore, the adjustment involves reducing the prepaid asset account and increasing the expense account.

Determine the correct journal entry: To adjust for the portion of the prepaid expense that has been used, you need to debit the expense account (to increase the expense) and credit the prepaid asset account (to decrease the asset).

Avoid common misconceptions: Do not credit a revenue account, as prepaid expenses are not related to revenue generation. Similarly, do not debit a liability account, as prepaid expenses are not liabilities—they are assets until consumed.

Prepare the adjusting journal entry: The adjusting journal entry will look like this: Debit the appropriate expense account (e.g., Rent Expense) and Credit the prepaid asset account (e.g., Prepaid Rent) for the amount of the expense that has been used during the period.