Ch 4.2 Adjusting Entries for Pre Payment Flashcards
Prepayments are also known as
deferrals
prepaid expenses (expenses paid in advance) and
deferred revenues (revenues received in advance)
prepaid expenses (expenses paid in advance) and deferred revenues (revenues received in advance)
Prepaid expenses are A or L?
Assets
Deferred Revenues are A or L
Liabilities
When do prepaid expenses expire
1_ with the passage of time (insurance)
2_ through use (Supplies)
Adjusting entry: Prepaid Expenses
What are the two things you are doing?
1) reduce the asset, so the account reflects only remaining benefits (CREDIT TO ASSET ACCOUNT)
2) record the expense still applying to the current accounting period (INCREASE TO EXPENSE ACCOUNT)
If expenses are understated, then net income, retained earnings, and shareholders’ equity will be overstated.
If expenses are understated, then net income, retained earnings, and shareholders’ equity will be overstated.
Insurance: dealing with prepaid expenses
explain the process
-UNADJUSTED TRIAL BALANCE: insurance payments made in advance recorded in the asset account (DEBIT)
-ADJUSTED TRIAL BALANCE: increases expense (debit to) and decreases prepaid insurance for the cost of insurance that has been paid (Credit to asset)
Supplies: how to adjust journal entries
Purchasing (Supplies) increase amount
During the accounting period, supplies are used.
Rather than recording supplies expense as the supplies are used, supplies expense is recognized at the end of each accounting period.At that time, the company must count and determine the cost of the remaining supplies.The difference between the balance in the Supplies (asset) account and the cost of the remaining supplies is the cost of the supplies used (an expense) during that period.An adjusting entry is made to increase (debit) Supplies Expense and decrease (credit) Supplies for the cost of the supplies used during the period.
BASICALLY, you adjust the entreis by recording an opposite D/C then what you would naturally record, this number is the amount that is adjusted btw
BASICALLY, you adjust the entreis by recording an opposite D/C then what you would naturally record, this number is the amount that is adjusted btw
Straight line depreciation
A common practice for calculating depreciation expense for a period of time is to divide the cost of the asset by its useful life. This is known as the straight-line method of depreciation.
Formula for straight line depreciation
cost/ useful life (in years) = annual depreciation expense
Accumulated depreiciaotn is a contra asst account, which means that
ITS NORMAL BALANCE IS THE OPPOSITE OF THE ACCOUNT IT RELATES TO
EQUIPMENT: ASSET ACCOUNT (NORMAL BALANCE IS DEBIT)
ACCUMULATED DEPRICIATION: Contra asset account (normal balance is credit)
wherever the normal balance is
that is what is increased
why use contra asset accounts?
separate the depreciaiton expense and the actual expense of the account
using the contra asset acount for depreciation example
equipment will stay at the debited valye of $5000 for 5 years
the contra asset account will increase credit balace by $83 for 12 months for 5 years until it is 1000
IF WE DID NOT ADJUST ENTRY: depreciation expense will be understate, and net income overstates
If we do not adjust entry for prepaid expenses
Net income is overstated because prepaid expenses are not reduced, and Shareholders equity is also overstated bc of net income
If we do not adjust entry for deferred revenue…
liabilities are overstated, revenues and net icnome are understated
if net income understated then SE is understated too
Deferred Revenues/unearned revenues
when cash is recieved before g/s are provided
Liability: Deferred Revenue (c)
Asset: Cash (D)
one companys defererd revenue is another companys?
Prepaid expense
adjusting entry to record the revenue is
Decrease in laibility (debit to deferred revenue)
Increase to revenue account (Credit)
