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    ngocanh's Avatar
    ngocanh Posts: 4, Reputation: 1
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    #1

    Aug 9, 2008, 12:58 AM
    Prepaid expense and income
    If an insurance policy for 2 years was entirely expense in one year. How do I correct this error?

    Ex: if policy for 2 years is 12,000 and it all expense in one year, the income would be understated by 6,000?:confused:

    The correct entry would be:

    Insurance expense 6,000
    Prepaid insurance 6000
    Retained Earning 12,000
    smartme's Avatar
    smartme Posts: 5, Reputation: 1
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    #2

    Aug 9, 2008, 10:50 AM
    So the entry that you made in first year was

    Insurance expense 6,000
    Prepaid insurance 6000
    Retained Earning 12,000

    But it should have been

    Insurance Exp 12,000
    Cash 12,000
    Since you expensed the whole amount... I don't understand why are you going through the R/E method.

    Then the second year you should have got

    Prepaid Insurance 6,000
    Insurance expense 6,000

    Since you already paid. But it depends on the books and company. If the books were corrected before the year end as they have to report their taxes. You also have to watch whether the fiscal period end is as same as the year end date.

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