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Questions and Answers
What is the correct accounting treatment for prepaid expenses?
What is the correct accounting treatment for prepaid expenses?
- An expense account is debited and a liability account is credited.
- An asset account is debited and a liability account is credited.
- A liability account is debited and a cash account is credited.
- An asset account is debited and a cash account is credited. (correct)
Which of the following is an example of unearned revenue?
Which of the following is an example of unearned revenue?
- Rent paid for an office space already occupied
- Cash paid for educational materials received immediately
- Insurance premiums paid for the next year
- Payment received for a subscription service not yet rendered (correct)
What happens to prepaid expenses as time passes or items are used?
What happens to prepaid expenses as time passes or items are used?
- They expire and need to be reclassified. (correct)
- They are immediately expensed.
- They become cash equivalents.
- They are capitalized as long-term assets.
Closing entries at the end of the accounting period serve to:
Closing entries at the end of the accounting period serve to:
When dividends are declared, which of the following journal entries is correctly made?
When dividends are declared, which of the following journal entries is correctly made?
In what order are accounts typically closed at the end of the accounting period?
In what order are accounts typically closed at the end of the accounting period?
How is the cash account affected when prepaid expenses are recorded?
How is the cash account affected when prepaid expenses are recorded?
Which type of account is dividends classified as?
Which type of account is dividends classified as?
Flashcards
Prepaid Expenses
Prepaid Expenses
Expenses paid in cash before they are used or consumed. This represents a future benefit to the company.
Prepaid Expenses on the Balance Sheet
Prepaid Expenses on the Balance Sheet
An asset account that is debited to reflect the future benefit from prepaid expenses.
Deferrals
Deferrals
Revenues or expenses that are recognized at a different time than when cash was exchanged.
Prepaid Expenses (Deferral)
Prepaid Expenses (Deferral)
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Unearned Revenues (Deferral)
Unearned Revenues (Deferral)
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Dividends
Dividends
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Dividends Account
Dividends Account
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Retained Earnings
Retained Earnings
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Study Notes
Prepaid Expenses
- Expenses paid before use or consumption.
- Increase an asset account (debit) to reflect future benefit.
- Decrease the cash account (credit) reflecting cash outflow.
- Examples include insurance, supplies, advertising, and rent.
- Expire over time (rent, insurance) or through use (supplies).
Deferrals
- Postponing or delaying recognition of revenue or expenses.
- Two types: prepaid expenses and unearned revenues.
- Prepaid expenses: Expenses paid before use, recognized later.
- Unearned revenues: Revenues received before performance, recognized later.
Unearned Revenues
- Opposite of prepaid expenses; cash received before the service or product is provided.
- A liability account (e.g., unearned revenue) is credited when cash is received.
- Common examples include rent, subscriptions, and airline tickets. A company receiving advanced payments for services to render.
- This is a liability account, and the cash received is an asset.
Closing Entries
- At period-end, temporary account balances are moved to retained earnings.
- Revenue and expense accounts are often closed to an intermediate temporary account called Income Summary.
- The Income Summary balance represents the period's net income or loss.
- Income Summary is then closed to Retained Earnings.
Dividends
- Declaring dividends:
- Debit Dividends account.
- Credit Dividends Payable account.
- Paying dividends:
- Debit Dividends Payable account.
- Credit Cash account.
- Dividends are a temporary shareholders' equity account closed at period-end.
- Closing entries transfer the dividend amount.
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Description
This quiz covers the concepts of prepaid expenses and deferrals in accounting. Learn about how these expenses are recognized over time and their impact on financial statements. It also explores unearned revenues and their classification as liabilities.
