Question

review this list of the four types of adjustments: Prepaid Expense, Unearned Revenue, Accrued Revenue, Accrued Expense Then, follow these steps to participate in the discussion forum: Please select one type of adjustment. Define the term giving a detailed explanation. Provide a specific adjusting journal entry and explain it.

Answer 1

Prepaid expenses

The expenses which have been  paid in advance , whose benefit will be available in future are called unexpired or prepaid expenses. Expenses such as insurance premium , taxes , rent you pay before using it  etc. are ususally paid for a whole year in advance. since such expenses are already paid they are also recorded in the books of accounts of that particular period.

The whole of these payments are not related to the current period and , therefore , the amount which is applicable to the current financial year only charged to the revenue accont and the portion of the amount paid in advance should be carry forward to the next accounting period.

example :

an insurance policy is taken for a year paying Rs. 4000 as insurance premium on 1st  october 2019 and will expire on 30 th september 2020 . The position on on 31 st march when accounts are closed ,Rs. 2000 (october  to march) will be anovember expense for the period and remaining Rs. 2000 (april to september) will be unexpired or prepaid expenses.

the journal entry will be :

prepaid insurance a/c dr. 20000

to, insurance a/c 20000

• the prepaid expenses will be shown in the debit side of the profit and loss account by way of deduction from the respective expenses.
• it will be shown on the asset side of the balance sheet as prepaid expenses.