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

Prepaid expenses reflect transactions when cash is paid:

only for expenses that are never used

after the goods or services have been received

as a reduction to revenue

in advance for goods or services to be received in the future

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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 received or used in the future. These are recorded as assets initially because they represent future economic benefits.

Recognize the accounting treatment: When a prepaid expense is incurred, it is recorded as an asset on the balance sheet under 'Prepaid Expenses' or a similar account. This reflects the fact that the company has paid for something it has not yet used or consumed.

Identify the timing of expense recognition: As the goods or services are received or consumed, the prepaid expense is gradually expensed on the income statement. This aligns with the matching principle, which ensures expenses are recognized in the same period as the related revenues.

Understand the journal entries: When cash is paid for a prepaid expense, the journal entry is: Debit 'Prepaid Expenses' (asset account) and Credit 'Cash' (asset account). As the expense is used, the journal entry is: Debit 'Expense' (income statement account) and Credit 'Prepaid Expenses' (asset account).

Apply the correct answer: Based on the explanation, prepaid expenses reflect transactions when cash is paid in advance for goods or services to be received in the future. This ensures proper accounting treatment and compliance with financial reporting standards.