Question

We have learned about four types of adjustments: (1) prepaid expenses, (2) unearned revenues, (3) accrued revenues, and (4) accrued expenses.

Select one specific adjusting entry that falls under one of the four types, enter it in the subject box, and post the following:

1. A description of the adjustment and why it is necessary.

2. Provide an example of the transaction; include the debit and credit, with dates and amounts in the proper journal entry format.

3.  In your replies discuss the status of the accounts affected prior to the adjustment (understated or overstated), and explain the impact of the adjustment on the financial statements.

The following example is for supplies:

1. The adjusting entry for supplies is a prepaid expense entry. Supplies requires an adjustment because the amount in the supplies account does not represent what we actually have on hand. The the amount that we have used is an expense.
2. The example using supplies: We determine that $500 in supplies have been used during the period. The journal entry is:

12/31/19	Supplies expense		500
	Supplies			500

Answer 1

Prepaid Expense: The word "Prepaid" itself denotes that something is given in advance and corresponding services are not availed yet. Therefore companies generally paid cash in advance to avail services like insurance, which will be paid at the starting of the policy. For example, Zantec Inc., purchase an insurance policy on December 01, 2019. for 12 months and paid cash $12.000. Journal entry on December 01, 2019: Credit Date General journal Dec. 01. 2019 Prepaid insurance Cash Debit $12.000 $12.000 Adjusting entry as follows: Credit Date Dec. 31, 2019 General journal Insurance expense Prepaid Insurance ($12,000/12)x 1 month Debit $1,000 $1,000 Prepaid insurance falls in the current asset of the balance sheet. Insurance expense falls in the income statement as an expense.