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 the purpose of adjusting journal entries for prepaid expenses at the end of an accounting period?

To allocate the portion of prepaid expenses that has been used up during the period to expense accounts.

To reverse previously recorded expense transactions.

To recognize revenue that has been earned but not yet received in cash.

To record the initial payment of cash for future expenses.

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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 accounting periods. Examples include prepaid rent, insurance, or subscriptions.

Recognize the purpose of adjusting entries: Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are recognized in the period they are incurred, following the accrual basis of accounting.

Focus on the specific adjustment for prepaid expenses: The purpose of adjusting journal entries for prepaid expenses is to allocate the portion of the prepaid amount that has been used or expired during the accounting period to the appropriate expense account.

Understand the mechanics of the adjustment: The adjustment involves reducing the prepaid expense account (an asset account) and increasing the corresponding expense account. This ensures that the financial statements accurately reflect the expense incurred during the period.

Eliminate incorrect options: The adjustment for prepaid expenses does not reverse previously recorded transactions, recognize earned revenue, or record initial cash payments. Its sole purpose is to allocate the used portion of prepaid expenses to expense accounts.