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 recorded in adjusting journal entries at the end of an accounting period?

Cash is debited and a revenue account is credited to recognize the prepaid expense.

A prepaid asset account is debited and an expense account is credited to recognize the portion of the prepaid expense that has been used.

An expense account is debited and a prepaid asset account is credited to recognize the portion of the prepaid expense that has been used.

An expense account is debited and cash is credited to recognize the prepaid expense.

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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 or used in future periods. These are initially recorded as assets because they represent future economic benefits.

Recognize the need for adjusting entries: At the end of the accounting period, an adjusting journal entry is required to allocate the portion of the prepaid expense that has been used or expired during the period. This ensures that expenses are matched with revenues in the correct period, adhering to the matching principle.

Determine the accounts involved: The adjusting entry for prepaid expenses involves two accounts: an expense account (to recognize the portion of the prepaid expense that has been used) and a prepaid asset account (to reduce the asset balance for the amount that has expired).

Understand the journal entry structure: The adjusting entry will debit the expense account to increase the expense and credit the prepaid asset account to decrease the asset. This reflects the consumption of the prepaid expense during the period.

Apply the correct journal entry: The adjusting journal entry at the end of the accounting period is: Debit the expense account (e.g., Rent Expense) and Credit the prepaid asset account (e.g., Prepaid Rent) for the amount of the prepaid expense that has been used or expired.