Question

In: Accounting

Indicate the type of Deferred Tax account created by Prepaid Expenses and Unearned Revenue, respectively. Select...

Indicate the type of Deferred Tax account created by Prepaid Expenses and Unearned Revenue, respectively.

Select one:

a. Asset, Liability

b. Liability, Asset

c. Asset, Asset

d. Liability, Liability

Expert Solution

*Option(a). Asset, Liability is the correct answer.

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*Both Prepaid expenses and unearned revenues are comes under adjusting entries.

*Adjusting entries- Entires made at the end of an accounting period to ensure that companies follow revenue recognition and expense recognition principles.

*Adjusting entries are classified as either deferrals or accruals.

**Deferrals:Expenses or revenues that are recognized at a date later than the point when cash was originally exchannged.

**The Tax consequences of balance sheet prepaid expenses and unearned revenues are deferred until some time in the future.

*Prepaid Expenses-

Expenses paid in cash before they are used or consumed;
When companies reocrd payments of expenses that will benefit more than one accounting period,
They record an asset account called prepaid expenses.

*Unearned Revenues-

Cash received before services are performed.
When companies receive cash before services are performed,
Initially record as liability account called unearned revenue.

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ekkarill92 answered 11 months ago

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