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 the adjusting journal entry required when a company recognizes prepaid insurance expense at the end of an accounting period?

Debit Insurance Expense; Credit Cash

Debit Insurance Expense; Credit Prepaid Insurance

Debit Cash; Credit Insurance Expense

Debit Prepaid Insurance; Credit Insurance Expense

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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 to be received in the future. In this case, prepaid insurance represents an asset because it provides future economic benefits.

Recognize the need for an adjusting journal entry: At the end of the accounting period, the portion of prepaid insurance that has been used or expired must be recognized as an expense. This ensures compliance with the matching principle, which states that expenses should be recognized in the same period as the revenues they help generate.

Determine the accounts involved: The adjusting entry will involve reducing the Prepaid Insurance account (an asset) and increasing the Insurance Expense account (an expense). This reflects the consumption of the prepaid insurance during the period.

Formulate the journal entry: The adjusting journal entry will debit the Insurance Expense account to record the expense incurred and credit the Prepaid Insurance account to reduce the asset balance.

Verify the correct answer: Based on the options provided, the correct adjusting journal entry is 'Debit Insurance Expense; Credit Prepaid Insurance,' as this properly reflects the recognition of the expired portion of prepaid insurance.