Which of the following statements is correct about prepaid accounts O Prepaid accounts are also called prepaid expenses and are considered assets. A prepaid expense is an expense which has been paid in advance. B) Prepaid Insurance, Property, Plant & Equipment, Fees Earned. B. Unearned Revenue. Intangible assets normally include non-physical items and rights. Answer Save. This preview shows page 5 - 7 out of 9 pages.. 26. Interest Revenue B. Prepaid Insurance C. Insurance Expense D. Supplies Expense. 1. Which of the following accounts is not considered a current liability? When the prepaid is reduced, the expense is recorded on the income statement. The profit or as deductions from the total revenue. Nature of prepaid expenses Prepaid expenses are expenses paid for in advance and recorded as assets before they are used or consumed. Examples of intangible assets include goodwill, trademarks, copyrights, patent rights and brand recognition etc. At the end of April one third of the prepaid rent expense (1,000) will have been used up as the business has used the premises for that month. D) Rent Revenue, Fees Earned, Miscellaneous Expense. OpenStax. Principles of Accounting Volume 1. Examples of prepaid expenses can be insurance premiums or rent. Tangible assets are physical items such as building, machinery, inventories, receivables, cash, prepaid expenses and advance payments to other parties. Otherwise, the default entry is to record an expenditure as a expense. 3. useful in simplifying the recording of transactions in the next accounting period. If the user has multiple prepaid expenses to track, it is suggested that they create sub-accounts of the Prepaid Expenses account in order to track each separately. The debits and credits are shown in the following journal entry: Since cash was paid out, the asset account Cash is credited and another account needs to be debited. 19th Edition. Relevance. 2. Lv 7. Publisher: OpenStax College. Examples of Prepaid Expenses. They are also known as unexpired expenses or expenses paid in advance. For example, sales would be listed before non-operating income. Sample Chart of Accounts. C. Dividends. Welcome to Sciemce, where you can ask questions and receive answers from other members of the community. Accounting and legal fees. A manufacturer would record an expense when it pays its employees for producing its products. Equipment D. Prepaid Rent 27. If you use the accrual method of accounting, claim any expense you prepay in the year or years in which you receive the related benefit. This records the prepayment as an asset on the company’s balance sheet. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited. Because the advance payment is for a future expense that has not occurred, it is classified as a current asset on the balance sheet of a business. 9 years ago. A common prepaid expense is the six-month insurance premium that is paid in advance for insurance coverage on a company's vehicles. Expenses accounts are equity accounts with a debit balance. Expenses are considered ... (an asset) is recorded when the amount is paid. ISBN: 9781947172685. Following accounting entry will be recorded in the year 2017: This asset will be recognized as an expense in the next accounting year to which the rental expense relates. Individuals and businesses alike can accrue prepaid expenses. On your 2021 income tax return, you could then deduct the balance of $200 for the part of the prepaid lease that applies to 2021. O Prepaid accounts are another name for accounts receivable and are reported as an asset. This represents the part of the expense that applies to 2019 and 2020. The balance in the Prepaid Expenses account should be zero at the end of the coverage period. Like accounts receivable, prepaid expenses are assets because they are a claim to assets. Prepaid expenses are future expenses that have been paid in advance. It lets you deduct a prepaid future expense in the current year if the expense is for a right or benefit that extends no longer than the earlier of: 12 months, or; until the end of the tax year after the tax year in which you made the payment. Topic: Closing the Temporary Accounts 75. On the 1 January it pays the next quarter rent of 15,000 to cover the 3 months of January, February, and March. In this case one asset (pre paid rent) has been increased by 3,000 and the other (cash) has been reduced by a similar amount. A prepaid expense, such as prepaid rent, is an asset that turns into a cash expense as the rent is used up each month . Select one: Unearned Fees Supplies Accounts Receivable Unearned subscriptions The type of account and normal balance of Accumulated Depreciation is Select one: contra asset, debit asset, debit contra asset, credit asset, credit A. What is considered a prepaid expense? It has a prepaid expense of 15,000. A. a) cash, fees earned, unearned revenues b) prepaid expenses, unearned revenues, fees earned c) capital account, drawing account, income summary d) drawing account, fees earned, rent expense In accrual accounting you are trying to accurately reflect revenue and expenses in the periods they are generated or used, no matter when payments are actually received or paid. When coding supplier invoices for entry into the accounting system, obtain written approval from the assistant controller that a billing should be coded as a prepaid expense. C) Capital Stock, Dividends, Income Summary. Initial Recognition of Prepaid Expenses. Generally, this is an Other Current Asset account. Common prepaid expenses include rent, insurance, interest, and the cost of obtaining a lease or loan. D. Earned Revenue. Accounts Receivable C. Inventory B. To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Understand Difficulty: Easy Learning Objective: 05-04 Explain the purposes of closing entries; prepare these entries. O Prepaid accounts are current expense accounts and are reported on the income statement. Create an account to track the prepaid expense. Which of the following accounts is considered a permanent or real account? A summary of all expenses is included in the income statement Income Statement The Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. The second entry requires expense accounts close to the Income Summary account. Which of the following accounts is not considered a current asset? QuickBooks Desktop for Mac. A. *82. Prepaid expenses are shown in the assets section on the balance sheet. Prepaid rent is a balance sheet account, and rent expense is an income statement account. For this transaction the Accounting equation is shown in the following table. Principles of Accounting Volume 1. Find Find arrow_forward. In some cases, part or all of the expense accounts simply are listed in alphabetical order. Examples of current assets are cash, accounts receivable, and inventory. Expense accounts are considered contra equity accounts because their balance decreases the overall equity balance. The following procedure shows a consistent way of charging these items to expense. Welcome to Sciemce, where you can ask questions and receive answers from other members of the community. JKRB. A) Cash, Retained Earnings, Wages Payable . In small business, there are a number of purchases you may make that are considered prepaid expenses. Cash: ... Prepaid expenses: Prepaids are any expense the business pays for in advance, such as rent, insurance, office supplies, postage, travel expense, or advances to employees. The amount paid is often recorded in the current asset account Prepaid Insurance. 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