Question

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?

2. Why it important to reconcile the bank statement? What are some of the items involved in the reconciliation process? What do you do when you find errors during reconciliation? What happens if you don’t fix them? Name other accounts that can be reconciled.

Answer 1

1.Prepaid expenses are when the company pay for items that will receive in the future date. When company pay for something before they receive it, they gain a prepaid expense. Prepaid expenses do not provide value right away but they provide value over time.

Prepaid expenses expire as the company uses them. Company cannot expense the entire value of the item immediately. It must be recorded as prepaid expense infinancial records and adjust entries as it is used.

Adjustment entries made for a period before preparing financial statements are:

Outstanding expenses

Accrued Income

Unearned revenues

Inventory

2.A bank reconciliation is used to compare your records to those of your bank, to see if there are any differences between these two sets of records for your cash transactions. The ending balance of the cash records is known as the book balance, while the bank's version is called the bank balance

Items involved in bank reconciliation are cash deposits, check deposits, check payments, bank service charges, bank interest income

Errors would cause the balance shown in the bank statement to be higher or lower than cash book balance depending on the nature of the error or the omission.

The difference needs to be eliminated by adjusting the cash book of the company before the preparation a bank reconciliation.

Other accounts that can be reconciled are:

Vendor reconciliation.

Customer reconciliation.

Inter-company reconciliation.