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 records prepaid expenses, which of the following best describes the adjusting journal entry required at the end of the accounting period?

Debit a revenue account and credit a prepaid asset account

Debit a liability account and credit a prepaid asset account

Debit an expense account and credit a prepaid asset account

Debit a prepaid asset account and credit an expense account

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

Recognize the need for an adjusting journal entry: At the end of the accounting period, a portion of the prepaid expense is typically consumed or used. To reflect this usage, an adjusting journal entry is required to transfer the appropriate amount from the prepaid asset account to the expense account.

Determine the accounts involved: The adjusting entry will involve debiting an expense account to recognize the cost incurred during the period and crediting the prepaid asset account to reduce the asset balance.

Write the adjusting journal entry: The format of the entry will be: Debit the expense account (e.g., Rent Expense) and Credit the prepaid asset account (e.g., Prepaid Rent). This ensures that the expense is properly matched to the period in which it was incurred, following the matching principle.

Review the impact of the adjustment: After the adjusting entry, the expense account will reflect the cost incurred during the period, and the prepaid asset account will show the remaining balance that will be used in future periods.