Multiple Choice
Which of the following best describes the adjusting journal entry required when a business recognizes prepaid expenses at the end of an accounting period?
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
Multiple Choice
Which of the following is the correct adjusting journal entry at the end of the period for prepaid insurance that has been partially used?
A
Debit Insurance Expense; Credit Cash
B
Debit Prepaid Insurance; Credit Insurance Expense
C
Debit Insurance Expense; Credit Prepaid Insurance
D
Debit Cash; Credit Insurance Expense
Verified step by step guidance1
Understand the concept of prepaid insurance: Prepaid insurance is an asset account that represents the amount paid in advance for insurance coverage. As time passes and the insurance is used, the prepaid insurance asset decreases, and the expense is recognized.
Identify the correct accounts involved: When prepaid insurance is partially used, the adjusting entry should decrease the Prepaid Insurance account (an asset) and increase the Insurance Expense account (an expense). This reflects the consumption of the insurance coverage during the period.
Determine the correct journal entry: To record the adjustment, you need to debit the Insurance Expense account to recognize the expense and credit the Prepaid Insurance account to reduce the asset balance.
Avoid common mistakes: Do not debit Cash or credit Insurance Expense directly, as these entries would not properly reflect the consumption of prepaid insurance. Cash is not involved in this adjustment since the payment was made earlier.
Write the adjusting journal entry: The correct entry is 'Debit Insurance Expense; Credit Prepaid Insurance,' which ensures the expense is recognized and the asset is reduced appropriately.
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