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

In the context of adjusting journal entries for prepaid expenses, how is the amount of expense recognized for a prepaid insurance policy determined at the end of an accounting period?

By recording the entire prepaid amount as an expense immediately upon payment

By allocating the portion of the prepaid amount that has expired during the period as an expense

By recognizing the prepaid amount as revenue over the policy term

By deferring all expense recognition until the policy expires

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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. In this case, the prepaid insurance policy represents an asset until the coverage period expires.

Identify the portion of the prepaid insurance that has expired: At the end of the accounting period, determine how much of the insurance coverage has been used up. This is typically done by dividing the total prepaid amount by the policy term (e.g., months or years) to calculate the monthly or periodic expense.

Calculate the expense for the current period: Multiply the periodic expense (e.g., monthly expense) by the number of periods (e.g., months) that have passed during the accounting period to determine the amount of insurance expense to recognize.

Record the adjusting journal entry: Debit the Insurance Expense account for the amount calculated in the previous step to recognize the expense. Credit the Prepaid Insurance account for the same amount to reduce the asset balance.

Verify the remaining balance in the Prepaid Insurance account: After the adjusting entry, ensure that the remaining balance in the Prepaid Insurance account reflects the unexpired portion of the policy, which will be carried forward to the next accounting period.