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

2. Transaction Analysis

Journal Entries: Business Formation Example

Financial Accounting

2. Transaction Analysis

Journal Entries: Business Formation Example

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Multiple Choice

On November 1, a company rented office space and paid $2,400 for three months' rent in advance. Which of the following is the correct journal entry to record this transaction?

Debit Rent Expense $800; Credit Cash $800

Debit Prepaid Rent $2,400; Credit Cash $2,400

Debit Cash $2,400; Credit Rent Revenue $2,400

Debit Rent Expense $2,400; Credit Cash $2,400

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Verified step by step guidance

Understand the nature of the transaction: The company is paying rent in advance for three months. This means the payment is a prepaid expense, which is an asset, not an immediate expense.

Identify the accounts involved: The two accounts affected are 'Prepaid Rent' (an asset account) and 'Cash' (another asset account). Prepaid Rent increases because the company now has a right to use the office space in the future, and Cash decreases because the payment is made.

Determine the type of entry: Since Prepaid Rent is an asset account, it is increased with a debit. Cash, also an asset account, is decreased with a credit.

Write the journal entry: Debit Prepaid Rent for $2,400 to reflect the increase in the prepaid asset. Credit Cash for $2,400 to reflect the decrease in cash.

Review the journal entry: Ensure that the total debits equal the total credits, which maintains the accounting equation (Assets = Liabilities + Equity). The correct journal entry is: Debit Prepaid Rent $2,400; Credit Cash $2,400.