Hello- This is my first time taking Accounting and I'm having a few problems with some of my entries. If anyone could look at my first entry and help it would be greatly appreciated.

I have to do the following:

Prepare entries for the transactions under the method that records prepaid expenses as assets and records unearned revenues as liabilities. I also have to prepare adjusting entries at the end of the year.

The for part 2 I have to prepare transactions under the method that records prepaid expenses as expenses and unearned revenues as revenues, and also prepare adjusting entries at the end of he year.

The first transaction is:

Nov.1 Paid 2,160 cash for 12 months if insurance throughout Oct. 31 of the next year

This is how I worked it out for part 1:

Nov.1 Insurance Expense............2,160
Prepaid Insurance..................2,160
Adjusted: Insurance Expense........1,800
Prepaid Insurance...............1,800
To adjust expired portion (2,160 X 10/12)

Does that look somewhat right? If I'm close, I'm confused on what should part 2 look like.

Thanks!!

CaptainForest

Question: on Nov. 1, bought insurance for $2,160 for 1 year which therefore, expire Oct. 31 of the next year.

Assumption: Year end is Dec. 31

PART 1 – record prepaid insurance as an asset and prepare adjusting entries at year end.

Nov. 1
DEBIT Prepaid Insurance 2,160
CREDIT Cash 2,160

b/c you used 2,160 in cash to put a prepaid asset



Dec. 31 (you need to adjust to record some expense since you have used 2 months worth of that prepaid insurance asset (Nov 1 – Dec 31)

DEBIT Insurance Expense 360
CREDIT Prepaid Insurance 360

2,160 x 2 / 12 = 360

Now, you have drawn down your Prepaid Insurance asset account.



PART 2 – record it all as an expense, then adjust it at the end of the year

Nov. 1
DEBIT Insurance Expense 2,160
CREDIT Cash 2,160

Dec. 31
DEBT Prepaid Insurance 1,800
CREDIT Insurance Expense 1,800

2,160 x 10/12 = 1,800



DIFFERENCE between the 2 methods:

You are only allowed to claim Insurance Expense of 360 for the year. In the end, either method gives you that.

Part 1 – 360
Part 2 – 2,160 – 1,800 = 360

Part 1, you make it an asset first, then expense it
Part 2, you expense it all, then make the last 10 months an assets at year end adjustments.