Question

What's the difference between a prepaid and an unearned account? Why is it necessary to adjust these at the end of the period? You can use prepaid rent vs unearned rent as examples in your explanation.

Answer 1

Prepaid rent is rent paid in advance prior to rental period. Expenses recorded as expense in accounting period in which it is incurred. It shown on the asset side of balance sheet.

Unearned account is money  received for services which are not  performed. It is shown on the liability side of balance sheet.

Necessary to adjust at the end of year

As per matching concept ,revenue or expense recognized in income statement when it is earned or incurred.If it is not adjusted, accurate  profit can't be calculated.

Journal Entry

Account title & Explanation Debit Credit

Rent paid $ 30000 for 3 years

• Prepaid rent $30000

Cash $30000

(To record rent paid as asset)

Adjusting entry is passed at the end of year

Service Revenue is received in advance $ 10000

• Cash $10000

Unearned account $10000

(To record Unearned account as liability)