Question

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

Answer 1

*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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