Prepaid expenses

Question 1

True or false, it is typical for bookkeepers to record prepayments as expenses

Answer 1

True

Question 2

What does the adjusting entry recognise prepayments as?

Answer 2

It recognises the right to potential future benefits as an asset called “prepaid expense”

Question 3

Why is a prepayment recognised as an “expense”?

Answer 3

In order to prevent the expense being reported before it has been incurred

Question 4

What do typical prepaid expenses included (4)

Answer 4

• Rent
• Insurance
• Prepaid electricity
• Stationery

Question 5

What are prepayments sometimes recorded as?

Answer 5

As assets

Question 6

If the bookkeeper records prepayments as expenses, don’t forget the __________ ______.

Answer 6

Reversing entry

Question 7

What happens on day 1 if the next financial year?

Answer 7

A reversing entry is processed, to reverse the prior year’s adjustment

Question 8

Why is a reversing entry processed? (2)

Answer 8

1. Adding the expense in the 2nd year

2. Removing the prepayment asset

Question 9

Why is the reversing entry processed on day 1? (2)

Answer 9

1. Because no source document will trigger the reversing entry later in the year
2. By the next reporting date, the ledger will correctly reflect events that took place at the start of the year

Question 10

What effects does the pre-adjusting TB include? (2)

Answer 10

• The reversing entry

- The bookkeeper’s entries

Question 11

What happens if the fee increases on a date? (2)

Answer 11

• The period starting on that date costs the business more

- Even if the payment for that period is made before