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 a reason companies use adjusting journal entries for prepaid expenses?

To correct errors made in previous accounting periods

To allocate the cost of prepaid expenses to the periods in which they are used

To recognize revenue when cash is received

To record cash received from customers in advance

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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 or used in future accounting periods. Examples include prepaid rent, insurance, or subscriptions.

Recognize the purpose of adjusting journal entries: Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are recognized in the correct period, following the accrual basis of accounting.

Identify why prepaid expenses require adjustment: Prepaid expenses initially appear as assets on the balance sheet because they represent future economic benefits. As the benefits are consumed or used, the cost must be allocated to the appropriate period as an expense.

Determine the adjustment process: To allocate the cost of prepaid expenses, an adjusting journal entry is made to decrease the prepaid expense account (asset) and increase the corresponding expense account. This ensures accurate representation of expenses in the income statement.

Relate the adjustment to the options provided: The correct reason for adjusting prepaid expenses is 'To allocate the cost of prepaid expenses to the periods in which they are used,' as this aligns with the accrual accounting principle of matching expenses to the period they benefit.