Prepaid Expenses Simple balance day adjustments Prepaid expenses

Prepaid Expenses

Simple balance day adjustments

Prepaid expenses What are they? - give me an example?

Prepaid Expenses EXAMPLES: • Insurance • Registration • Trade membership • Subscriptions

Balance Day Adjustments: Prepayments • Prepayments represent the apportioning of amounts already in the ledger to different accounting periods- this is different to accruals because they are not already in the ledger. Prepaid Expenses • Are expenses that have been paid and recorded in the current accounting period but will not be incurred until a future accounting period. • Prepaid expenses are amounts owing to the business and are therefore assets.

• Complete the following: a) Rent expense has been prepaid by one month at $200 per month b) Insurance has been prepaid for seven months at $500 per month

a) b)

Prepayment example Membership subscription to the Institute of Chartered of Australia of $817 was paid on 25 th June 2012 for the period 1 July 2012 to 30 June 2013 The original journal entry on 25 June 2012 would have been: Subscription Expense Dr $817 Bank Cr $817

Balance Day Adjustment IT IS NOW 30 JUNE 2012, DERIVE THE CORRECT BALANCE DAY ADJUSTMENT! Prepaid expenses (Asset) Dr $817 Subscriptions (Expense) Cr $817 (Balance-day adjustment)

BALANCE DAY ADJUSTMENTS 30 JUNE 2012 DERIVE THE JOURNAL REQUIRED: $2600 of vehicle registrations was prepaid for the next accounting period Prepaid expenses (Asset) Dr 2, 600 Registration (Expense) Cr 2’ 600 (Balance-day adjustment)

BALANCE DAY ADJUSTMENTS 30 JUNE 2012 DERIVE THE JOURNAL REQUIRED: $1200 insurance expenses has been paid, of which $900 has been paid in advance Prepaid expenses (Asset) Dr 900 Insurance (Expense) Cr 900 (Balance-day adjustment)

Balance Day Adjustments Balance day adjustments are general journal entries made as at balance day in order to compare the revenues and expenses accurately so that the profit (loss) can be determined.

AND WHY DO WE MAKE BALANCE DAY ADJUSTMENTS ?

A nice holiday rental by the ocean?

Key types of Balance Day Adjustments Prepaid expenses Accrued expenses Unearned revenues Accrued revenues

Is it prepaid expense? Prepaid expenses (Asset) ………. . . (Expense) Dr $ Cr $ Is it accrued expenses? ………………. . (Expense) Dr Accrued expenses (Liability) Is it accrued revenues? Accrued Revenues (Asset) ……………. . . (Revenue) $ Cr $ Dr $ Cr $ Is it unearned revenues? …………………(Revenue) Dr $ Unearned Revenue (Liability) Cr $

Prepayments • Complete activity 4. 7 on page 112.

Prepayments activity 4. 7 on page 112.

1500

You have the tools! Now solve the puzzles!

Balance day adjustments 30 June 2012 • Wages unpaid as at 30 June is $6000 • Prepaid insurance expense is $200 • Rent revenue received in advance is $317 • Rent expense of $200 is prepaid • Commission revenue of $2600 has been earned but not yet received • Telephone expense of $350 has been prepaid

HOME WORK : Balance day adjustments 30 June 2012 • Rent earned but not yet received is $230 • Commission received in advance is $230 • Wages unpaid are $2300 • $210 of the electricity bill is prepaid • Rent of $1200 was received on 1 May 2012 for the following 4 months • Weekly wages of $5000 are paid for a 5 day working week. Three days are owed as at 30 June 2012