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 statement most accurately describes the accounting treatment of prepaid expenses when preparing adjusting journal entries?

Prepaid expenses are recorded as liabilities and recognized as revenue over time.

Prepaid expenses are never adjusted at the end of the accounting period.

Prepaid expenses are initially recorded as assets and then gradually expensed over time as the benefits are consumed.

Prepaid expenses are immediately recorded as expenses when paid, with no need for future adjustments.

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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. Examples include prepaid rent, insurance, or subscriptions.

Recognize the initial accounting treatment: Prepaid expenses are initially recorded as assets on the balance sheet because they represent future economic benefits.

Explain the need for adjustments: As the benefits of the prepaid expenses are consumed over time, the asset is gradually reduced, and the corresponding expense is recognized on the income statement to match the period in which the benefit is used.

Describe the adjusting journal entry: At the end of the accounting period, an adjusting journal entry is made to transfer the portion of the prepaid expense that has been consumed from the asset account to the expense account. This ensures compliance with the matching principle in accounting.

Clarify the correct statement: The correct accounting treatment is that prepaid expenses are initially recorded as assets and then gradually expensed over time as the benefits are consumed. This aligns with the accrual basis of accounting.