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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
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ADJUSTING 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
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
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)
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?
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?
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
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?
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?
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!!
