Introduction to Adjusting Journal Entries and Prepaid Expenses quiz #1 Flashcards
Introduction to Adjusting Journal Entries and Prepaid Expenses quiz #1
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What is the primary purpose of adjusting journal entries in accrual accounting?
To update accounts for the passage of time and ensure revenues and expenses are recorded in the correct period. How do deferrals differ from accruals in accounting?
Deferrals involve cash transactions occurring before the related revenue or expense, while accruals record revenue or expenses before cash is exchanged. What is depreciation in the context of adjusting journal entries?
Depreciation allocates the cost of a long-term asset over its useful life, spreading the expense gradually rather than all at once. Why are prepaid expenses considered assets?
Prepaid expenses are assets because they represent future economic benefits from services or goods paid for in advance. What is the initial journal entry when a company pays rent in advance?
Debit prepaid rent (asset) and credit cash for the amount paid. How is the adjusting entry for prepaid rent recorded at the end of an accounting period?
Debit rent expense and credit prepaid rent for the portion of rent used during the period. What is the effect of an adjusting entry for prepaid expenses on the balance sheet?
It reduces the prepaid expense asset and increases the related expense on the income statement. How do you calculate the monthly expense for a prepaid item?
Divide the total prepaid amount by the number of months covered. If a company pays $12,000 for a year of rent on September 1, what is the monthly rent expense?
$1,000 per month ($12,000 ÷ 12 months). After four months, how much rent expense should be recognized if $12,000 was prepaid for a year?
$4,000 should be recognized as rent expense (4 months × $1,000 per month). What is the balance of prepaid rent after four months if $12,000 was paid in advance?
$8,000 remains as prepaid rent ($12,000 - $4,000). How does the cash basis of accounting treat prepaid rent payments?
It records the entire payment as an expense when cash is paid, regardless of the period benefited. How do you adjust from cash basis to accrual basis for prepaid rent at year-end?
Credit rent expense for the unused portion and debit prepaid rent to reflect the remaining asset. What is the adjusting entry if $24,000 is paid for 12 months of rent and 4 months have passed?
Debit rent expense $8,000 and credit prepaid rent $8,000. Why is it important to adjust prepaid expense accounts at the end of an accounting period?
To match expenses with the periods in which the related benefits are received, ensuring accurate financial statements. What accounts are affected by the adjusting entry for prepaid insurance?
Insurance expense (debited) and prepaid insurance (credited). What is the journal entry when a company pays $6,000 for a six-month insurance policy in advance?
Debit prepaid insurance $6,000 and credit cash $6,000. If two months have passed on a six-month prepaid insurance policy, what is the adjusting entry?
Debit insurance expense $2,000 and credit prepaid insurance $2,000. How do adjusting entries for prepaid expenses impact the income statement?
They increase expenses, reducing net income for the period. What is the purpose of spreading the cost of a long-term asset over its useful life?
To match the expense with the periods benefiting from the asset, following the matching principle. What is the difference between a prepaid expense and an accrued expense?
A prepaid expense is paid before the benefit is received, while an accrued expense is incurred before payment is made. How is the remaining balance in a prepaid expense account determined after an adjusting entry?
By subtracting the amount used (expensed) from the original prepaid amount. What is the effect of not making adjusting entries for prepaid expenses?
Assets will be overstated and expenses understated, leading to inaccurate financial statements. When is the adjusting entry for a prepaid expense typically made?
At the end of the accounting period, such as month-end or year-end. What is the correct adjusting entry if a company has $10,000 in prepaid rent and one month ($2,000) has expired?
Debit rent expense $2,000 and credit prepaid rent $2,000. Why do companies use adjusting entries for prepaid expenses instead of expensing the full amount immediately?
To accurately match expenses to the periods in which the related benefits are received. What is the impact on the financial statements if prepaid expenses are not adjusted?
Expenses will be understated and assets overstated, distorting net income and asset values. How does the accrual basis of accounting improve financial reporting compared to the cash basis?
It matches revenues and expenses to the periods they occur, providing a more accurate picture of financial performance. What is the initial impact on cash and prepaid expense accounts when a prepaid expense is recorded?
Cash decreases and prepaid expense (an asset) increases by the same amount. How do you determine the amount to expense for a prepaid item at period-end?
Multiply the monthly expense by the number of months that have passed. If a company pays $18,000 for a 9-month insurance policy, what is the monthly insurance expense?
$2,000 per month ($18,000 ÷ 9 months). After three months, how much of a $9,000 prepaid insurance policy should be expensed?
$3,000 should be expensed (3 months × $1,000 per month). What is the adjusting entry for supplies if some have been used by period-end?
Debit supplies expense and credit supplies for the amount used. What is the main reason for making adjusting entries for deferrals?
To recognize expenses or revenues in the period they are incurred or earned, not when cash is paid or received. How does the adjusting entry for prepaid rent affect the rent expense account?
It increases rent expense by the amount of rent used during the period. What is the correct journal entry to record the use of prepaid insurance?
Debit insurance expense and credit prepaid insurance for the amount used. If a company starts with cash basis accounting, how is the transition to accrual basis handled for prepaid expenses?
Adjust entries to reflect only the portion of the expense that has been used, creating or updating prepaid expense accounts for the unused portion. What is the effect of an adjusting entry on prepaid rent if no time has passed since payment?
No adjusting entry is needed; the entire amount remains as a prepaid asset. How do you calculate the remaining prepaid expense after several months have passed?
Subtract the total expense recognized (monthly expense × months passed) from the original prepaid amount. What is the adjusting entry if a company paid $15,000 for 5 months of rent and 2 months have passed?
Debit rent expense $6,000 and credit prepaid rent $6,000.
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