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 a company pays for insurance in advance, how should the payment be recorded at the time of payment?

As a debit to Cash and a credit to Prepaid Insurance

As a debit to Prepaid Insurance and a credit to Cash

As a debit to Insurance Payable and a credit to Cash

As a debit to Insurance Expense and a credit to Cash

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Verified step by step guidance

Understand the nature of the transaction: When a company pays for insurance in advance, it is considered a prepaid expense. Prepaid expenses are assets because they represent future economic benefits that the company will receive over the coverage period.

Determine the accounts involved: The payment involves two accounts: Prepaid Insurance (an asset account) and Cash (an asset account). Prepaid Insurance increases because the company now has an asset, and Cash decreases because the company has paid out money.

Apply the rules of debits and credits: In accounting, an increase in an asset account is recorded as a debit, and a decrease in an asset account is recorded as a credit. Therefore, Prepaid Insurance will be debited, and Cash will be credited.

Record the journal entry: The journal entry for this transaction will be: Debit Prepaid Insurance and Credit Cash. This reflects the increase in the prepaid asset and the decrease in cash.

Review the options provided: The correct answer is 'As a debit to Prepaid Insurance and a credit to Cash,' because this aligns with the accounting treatment of prepaid expenses and the rules of debits and credits.