adjusting journal entries prepayments/deferrals
DESCRIPTION
ADJUSTING JOURNAL ENTRIES Prepayments/Deferrals. Cash flows that occur BEFORE expense and revenue recognition Portion that applies to future periods is deferred as a prepaid expense or unearned revenue. Adjusting Entries for Prepayments/Deferrals. Recording Methods - PowerPoint PPT PresentationTRANSCRIPT
Std. vs. Expedient - 1ADJUSTING JOURNAL
ENTRIESPrepayments/Deferrals
Cash flows that occur BEFORE expense and revenue recognition
Portion that applies to future periods is deferred as a prepaid expense or unearned revenue
Std. vs. Expedient - 2
Adjusting Entries for Prepayments/Deferrals
Recording Methods– Specific accounting policy of the entity
Standard vs. Expedient– Either method is acceptable– Nature of adjusting entries will differ
dependent on the original recording approach
Std. vs. Expedient - 3
PREPAYMENTS/DEFERRALS
Standard Recording Method
Records an asset upon payment of cash and liability upon receipt of cash before goods or services are provided
– Cash paid recorded as an asset (Prepaids)
– Cash received recorded as liability (Unearned revenue)
Std. vs. Expedient - 4
Prepayment - ExampleStandard Method
On 12/1/X5, your company paid $1,200 for a six-month insurance policy. The $1,200 was recorded as Prepaid Insurance (an asset).
What AJE is needed on 12/31/X5?
Std. vs. Expedient - 5
Collection in Advance - ExampleStandard Method
On 11/1/X5, your company received $2,400 for a six-month rental of our excess warehouse space. The $2,400 was recorded as Unearned rental revenue (a liability).
What AJE is needed on 12/31/X5?
Std. vs. Expedient - 6
Here comes something Here comes something that’s A LITTLE BIT that’s A LITTLE BIT
DIFFERENT!DIFFERENT!
Std. vs. Expedient - 7
PREPAYMENTS/DEFERRALS
Expedient
Recording Method
Records an expense upon payment of cash before goods or services are consumed
Records revenue upon receipt of cash before goods or services are provided
Std. vs. Expedient - 8
Prepayment ExampleExpedient Method
On 12/1/X5, your company paid $1,200 for a six-month insurance policy. The $1,200 was recorded as Insurance expense.
What AJE is needed on 12/31/X5?
Std. vs. Expedient - 9
Collection in Advance - ExampleExpedient Method
On 11/1/X5, your company received $2,400 for a six-month rental of our excess warehouse space. The $2,400 was recorded as Rental revenue.
What AJE is needed on 12/31/X5?
Std. vs. Expedient -
10
Standard vs. ExpedientOther Comments
Adjusting entries under the expedient method appear unusual– Debits to revenue accounts – Credits to expense accounts
Regardless of the recording method used, the ultimate financial statements will be the same!!
Std. vs. Expedient -
11
WOW!