Question

Plz write in your own text and don't copy answers that was answered before since my teacher has (Plagiarism checker) thank you at least 3-4 paragraphs

1. What is a prepaid expense? Why does a company have to make this adjustment? What other adjusting entries do a company need to make for a period before preparing financial statements?

at least 3-4 paragraphs make sure u write in text not in pic

Answer 1

Prepaid expense is an expense which is incurred for the future period. For example, a rent paid on January 1, 2012 for the whole year, any other expense like utilities, maintenance, taxes, etc paid for the full year is accounted as prepaid expense.

The company has to make adjustment for prepaid expenses in Income statement in line with accrual concept and matching concept. For example let us assume monthly rent of $2,000 and in January month, a rent of $24,000 is paid for full year. Company will account $2,000 as rent for January and $22,000 as prepaid rent. Every Month Company needs to debit Rent expense and credit prepaid rent expense for $2,000. The debit of $2,000 to rent every month is accrual of expense and matching the prepaid expense to the period in which it is incurred

Other adjustment entries that company needs to make for a period before preparing financial statements are

· Accrual for salaries and wages payroll expense depending on cut off for payment.

· Accrual other expenses like maintenance, utilities, electricity, interest etc depending on date of payment

· Depreciation and amortization related entries for Fixed assets and Intangibles respectively