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 NOT part of the flow of events in accounting for prepaid expenses through adjusting journal entries?

Recognizing expense as the benefit is consumed

Adjusting the asset account at period end

Transferring prepaid expenses directly to revenue

Recording the initial payment as an asset

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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 periods. Initially, these payments are recorded as assets because they represent future economic benefits.

Review the flow of events in accounting for prepaid expenses: The typical process involves recording the initial payment as an asset, recognizing the expense as the benefit is consumed, and adjusting the asset account at the end of the period to reflect the portion of the prepaid expense that has been used.

Analyze the incorrect option: Transferring prepaid expenses directly to revenue is not part of the flow of events for prepaid expenses. Prepaid expenses are not revenue; they are future benefits that are gradually expensed as they are consumed.

Clarify the correct process: Prepaid expenses are systematically reduced through adjusting journal entries, which involve debiting the expense account and crediting the prepaid asset account to reflect the consumption of the benefit.

Conclude the reasoning: The incorrect option, 'Transferring prepaid expenses directly to revenue,' does not align with the proper accounting treatment of prepaid expenses, as revenue recognition is unrelated to the consumption of prepaid benefits.