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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Adjusting entries for prepaid insurance

The balance in the prepaid insurance account, before adjustment at the end of the year, is $18,630. Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment: (a) the amount of insurance expired during the year is $15,300; (b) the amount of unexpired insurance applicable to future periods is $3,330.

(a)

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

An adjusting entry for insurance expense:

In this case, the business recognized the insurance expenses at the end of the year. So, the necessary adjusting entry that the business should record to recognize the insurance expense is as follows:

Date Description

Post.

Ref

Debit

($)

Credit

($)

XXX Insurance expense    15,300  
  Prepaid insurance     15,300
  (To record the insurance  expense incurred at the end of the year)      

Table (1)

  • Insurance expense decreases the value of owners’ equity by $15,300 hence debit the insurance expense for $15,300...

(b)

To determine

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

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