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

When creating a budget, how should fixed expenses such as prepaid rent be recorded in the accounting system?

Record the entire prepaid amount as an expense immediately.

Record prepaid expenses as liabilities until paid.

Do not record prepaid expenses until the service is fully consumed.

Record the entire prepaid amount as an asset and expense it over time as it is used.

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Verified step by step guidance

Understand the nature of prepaid expenses: Prepaid expenses are payments made in advance for goods or services that will be consumed in the future. Examples include prepaid rent, insurance, or subscriptions.

Classify prepaid expenses correctly: Prepaid expenses are considered assets because they represent future economic benefits. They should not be recorded as expenses immediately upon payment.

Record the initial payment: When the prepaid expense is made, record the entire amount as an asset in the accounting system. For example, debit the 'Prepaid Rent' account and credit 'Cash' or 'Bank' to reflect the payment.

Expense the prepaid amount over time: As the service or benefit is consumed (e.g., each month of rent), transfer the appropriate portion of the prepaid amount from the asset account to an expense account. This is done using an adjusting journal entry.

Ensure compliance with the matching principle: The matching principle in accounting requires that expenses be recognized in the same period as the revenues they help generate. By expensing prepaid amounts over time, you align the expense recognition with the period of benefit.