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 should a company record an adjusting journal entry for prepaid expenses?

At the end of the accounting period, as the prepaid expense is used up

Only when cash is received from customers

At the beginning of the next fiscal year

When the prepaid expense is initially paid

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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 used in the future. 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 recorded in the correct period, following the accrual basis of accounting.

Identify when prepaid expenses are recorded: When a company initially pays for a prepaid expense, it is recorded as an asset because the benefit of the payment will be realized in future periods.

Determine when to adjust for prepaid expenses: At the end of the accounting period, the portion of the prepaid expense that has been used up or expired is transferred from the asset account to an expense account. This ensures that the expense is recognized in the correct period.

Conclude the correct timing: The adjusting journal entry for prepaid expenses should be recorded at the end of the accounting period, as the prepaid expense is used up, to comply with the matching principle in accounting.