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, which of the following best describes how the adjusting entry is recorded at the end of the accounting period?

Debit a prepaid asset account and credit a liability account

Debit a revenue account and credit a prepaid asset account

Debit an expense account and credit a prepaid asset account

Debit a prepaid asset account and credit an expense account

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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 in future accounting 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 entry is required to allocate the portion of the prepaid expense that has been consumed or expired during the period. This ensures that expenses are recognized in the correct period according to the matching principle.

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

Record the adjusting entry: Debit the expense account to increase the expense for the period, and credit the prepaid asset account to decrease the asset balance. This reflects the consumption of the prepaid expense.

Verify the impact on financial statements: The adjusting entry ensures that the expense is properly reported on the income statement, and the remaining balance of the prepaid asset is accurately reflected on the balance sheet.