Lesson: 29

Topic: Adjusting for Prepaid Expense

Objectives:

By the end of this class, the student should understand the purpose of, as well as the process involved in, recording adjusting entries in the General Journal, and the General Ledger. In specific, we will examine how to establish and adjust our prepaid expense accounts.

Students will review and come to appreciate that adjusting entries are required in order to assist accountants ensure the following obligations are met:

1. all accounts are brought up to date,
2. all late transactions are taken into account,
3. all calculations have been made correctly, and
4. all GAAP's have been complied with.

Students will come to understand how the principle of conservatism dictates that businesses must adjust their accounts to reflect changes which have occurred over time.

Whereas transaction entries are used to update accounts to reflect a transaction which has occurred, adjusting entries are generally used to correct for some effect related to the passage of time.

For example, we might have a transaction entry which records the purchase of supplies:

Date	Account	Debit	Credit
Dec. 31	Supplies on Hand	200.00
	Cash		200.00

After this first transaction entry, the balance of the supplies account would indicate that it presently contains the $200.00 worth of supplies which we purchased. However, the passage of time would see at least some of these supplies used up. For example, if we took an inventory of our Supplies on Hand account and discovered that $25.00 of supplies had been used, we would adjust the account accordingly. In order to update the supplies account so that it accurately reflects the account's present balance, we use an adjusting entry to record this consumption of supplies:

Date	Account	Debit	Credit
Dec. 31	Supplies Expense	25.00
	Supplies on Hand		25.00

Students will learn to record adjusting entries for all of the following situations:

• Prepaid Expenses:
  • supplies,
  • rent, and
  • insurance.

Method of Instruction and Evaluation:

After a Socratic lecture on the above topic, students will complete Exercise #2 page 308 of the course text.

Expectations Addressed:

The "Fundamental Accounting Practices" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

• Introduction to Accounting as a Discipline:

  • explain the purpose of accounting;

  • explain the difference between accounting and bookkeeping;

  • identify the users and uses of accounting;

  • identify the Generally Accepted Accounting Principles (GAAP) and explain their importance.
• Business Structures:
  • describe the characteristics of different forms of business organization, including sole proprietorship, partnership, and corporation;
  • describe the advantages and disadvantages of different forms of business organization, including sole proprietorship, partnership, and corporation;
  • explain the differences among the equity sections of different forms of business organization, including sole proprietorship, partnership, and corporation (e.g., capital account in a sole proprietorship versus common stock in shareholders’ equity in a corporation).
• The Accounting Cycle for a Service Business:
  • assess the effects that transactions have on the accounts and financial statements of a service business;
  • record transactions using the journals and ledgers of a service business;
  • prepare a trial balance and the financial statements for a service business;
  • record adjusting and closing entries for a service business (e.g., prepaid expenses, amortization, accruals);
  • describe the impact of year-end procedures, including adjusting and closing entries, on the financial statements of a service business;
  • apply the Generally Accepted Accounting Principles (GAAP) at each stage of the accounting cycle for a service business.

References:

Text: chapter #9, pages 303 - 307.