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

Which of the following best describes how prepaid expenses are adjusted at the end of an accounting period?

A prepaid asset account is debited and a revenue account is credited.

An expense account is debited and a prepaid asset account is credited.

A liability account is debited and an expense account is credited.

A revenue account is debited and a prepaid asset account is credited.

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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 to be received in the future. These are initially recorded as assets because they provide future economic benefits.

Recognize the need for adjustment: At the end of the accounting period, the portion of the prepaid expense that has been used or consumed must be recognized as an expense. This ensures compliance with the matching principle, which states that expenses should be recognized in the same period as the revenues they help generate.

Determine the accounts involved: The adjustment involves two accounts: (1) the prepaid asset account, which needs to be reduced to reflect the portion of the asset that has been used, and (2) the expense account, which needs to be increased to record the expense incurred during the period.

Record the adjustment entry: To adjust for the used portion of the prepaid expense, debit the expense account (to increase it) and credit the prepaid asset account (to decrease it). In MathML, this can be expressed as:

Expense = Debit

and

Prepaid = Credit

Verify the adjustment: After recording the adjustment, ensure that the remaining balance in the prepaid asset account represents the unused portion of the prepaid expense, and the expense account reflects the amount consumed during the period.