Accounts beforeType of adjustmentAdjusting entryadjustmentAsset overstatedPrepaid expensesDr. ExpensesCr. AssetsExpenses understatedUnearned revenuesLiabilities overstatedDr. LiabilitiesCr. RevenuesRevenues understatedAccrued revenuesAssets understatedDr. AssetsRevenues understatedCr.RevenuesAccrued expensesDr.ExpensesExpenses understatedLiabilities understatedCr. Liabilities6
6 Type of adjustment Accounts before adjustment Adjusting entry Prepaid expenses Asset overstated Expenses understated Dr. Expenses Cr. Assets Unearned revenues Liabilities overstated Revenues understated Dr. Liabilities Cr. Revenues Accrued revenues Assets understated Revenues understated Dr. Assets Cr. Revenues Accrued expenses Expenses understated Liabilities understated Dr. Expenses Cr. Liabilities
1.PrepaidExpensesPayments of expenses that will benefit more thanone accounting period are called prepaid expensesCommon prepayments are insurance, taxes, rents,anddepreciation,etc
7 1. Prepaid Expenses ⚫ Payments of expenses that will benefit more than one accounting period are called prepaid expenses. ⚫ Common prepayments are insurance, taxes, rents, and depreciation, etc
Whenexpenses arepaidAn asset account is increased to show thebenefit that will be received in the futureAttheend of eachaccounting periodApportion is needed to record the expensesthat occurred in the current period8
8 ⚫ An asset account is increased to show the benefit that will be received in the future When expenses are paid At the end of each accounting period ⚫ Apportion is needed to record the expenses that occurred in the current period
Adjustmentforprepaid expensesAssetsExpensesOverstatedAdjustingAdjustingBalanceEntry(-)Entry(+)9
9 Adjustment for prepaid expenses Assets Expenses Overstated Balance Adjusting Entry(-) Adjusting Entry(+)
Example(1)PrepaidInsuranceTarget paid a $1,200 for a 3-month insuranceWhenexpenses arepaid1,200Dr.PrepaidInsuranceCr. Cash1,200Attheendofthemonth400Dr.Insurance Expense400Cr.PrepaidInsuranceassets = liabilitie s +owner'seguity10
10 Example(1) Prepaid Insurance ⚫ Target paid a $1,200 for a 3-month insurance. assets = liabilitie s + owner'sequity Dr. Prepaid Insurance 1,200 Cr. Cash 1,200 When expenses are paid At the end of the month Dr. Insurance Expense 400 Cr. Prepaid Insurance 400