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 which of the following situations is a company most likely to benefit from implementing adjusting journal entries for prepaid expenses?

When the company receives cash from customers for services already performed.

When the company issues common stock to investors.

When the company pays for insurance coverage in advance for the next year.

When the company borrows money from a bank and records a note payable.

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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 the future. These are recorded as assets initially and adjusted over time as the benefit is realized.

Identify the situation described in the problem: The company pays for insurance coverage in advance for the next year. This is a classic example of a prepaid expense because the payment is made upfront, but the benefit (insurance coverage) is spread over the next year.

Explain why adjusting journal entries are necessary: Adjusting entries ensure that the expense is recognized in the correct accounting period. For prepaid expenses, this involves reducing the prepaid asset account and recording the expense as it is incurred over time.

Outline the adjusting journal entry process: At the end of each accounting period, calculate the portion of the prepaid expense that has been used or expired. Debit the expense account (e.g., Insurance Expense) and credit the prepaid asset account (e.g., Prepaid Insurance) for the amount used.

Highlight the benefit of adjusting entries: By implementing adjusting journal entries, the company ensures accurate financial reporting, matching expenses to the periods in which they are incurred, and providing a clear picture of the company's financial position.