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 best describes how prepaid expenses are reported on the balance sheet after adjusting journal entries have been made at the end of the accounting period?

As liabilities, representing amounts owed to suppliers

As revenues, since they represent future income

As expenses, for the total amount originally paid

As assets, reduced by the amount that has been used or expired during the period

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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. Examples include prepaid rent, insurance, or subscriptions.

Recognize how prepaid expenses are initially recorded: When a prepaid expense is incurred, it is recorded as an asset on the balance sheet because it represents a future economic benefit.

Learn about adjusting entries for prepaid expenses: At the end of the accounting period, an adjusting journal entry is made to account for the portion of the prepaid expense that has been used or expired during the period. This reduces the prepaid expense asset account and records the used portion as an expense in the income statement.

Understand the reporting on the balance sheet: After the adjusting entries are made, the remaining balance in the prepaid expense account represents the portion of the payment that is still a future benefit. This remaining balance is reported as an asset on the balance sheet.

Connect the explanation to the correct answer: Prepaid expenses are reported as assets on the balance sheet, reduced by the amount that has been used or expired during the period, reflecting their adjusted value after the adjusting journal entries.