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 is the correct adjusting journal entry at the end of the period for prepaid insurance that has been partially used?

Debit Insurance Expense; Credit Cash

Debit Prepaid Insurance; Credit Insurance Expense

Debit Insurance Expense; Credit Prepaid Insurance

Debit Cash; Credit Insurance Expense

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Verified step by step guidance

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.