From the course: Advanced Bookkeeping Techniques
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Recording the paying for and then use of prepaid expenses
From the course: Advanced Bookkeeping Techniques
Recording the paying for and then use of prepaid expenses
- One type of adjusted entry records the gradual use of a prepaid expense, such as rent or insurance. To illustrate, suppose a company purchases a one-year insurance policy by paying $1,200 cash on October 1st of year one. On October 1st, a regular journal entry is made, recording the payment of cash and the purchase of insurance. Now first, does this transaction involve any cash? Yeah. Cash decreases by $1,200. We know that asset decreases are recorded with credits. So here's the start of our journal entry. Second, are there any other assets involved? Well, yes, the asset's called prepaid insurance and represents the valuable right that has been purchased by the company. The right to insurance coverage for the next year. The amount of prepaid insurance that asset goes up. Asset increases are recorded with debits. So, here is the completed journal entry that is made on October 1st. A similar asset is recorded if a…
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