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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Adjustment for prepaid expense

The prepaid insurance account had a beginning balance of $4,500 and was debited for $16,600 of premiums paid during the year. Journalize the adjusting entry (include an explanation) required at the end of the year, assuming the amount of unexpired insurance related to future periods is $5,600.

To determine

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To prepare: The adjusting entry at the end of the year.

Explanation

Working note:

Calculate the value of insurance expense at the end of the year

Insurance expense = [(Beginning balance of prepaid insurance + Premium paid during the year) – Unexpired insurance at end of the year

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