The company will pass this adjusting journal entry every month for the next 12 months to prepare and present the correct monthly financial statement of the company, after which the balance of prepaid rent and insurance account will become nil.. Example #2. Before diving into the wonderful world of journal entries, you need to understand how each main account is affected by debits and credits . Answer: The salaries and wages expense to be paid for the year 2015 is equal to $12,000 (1,000*12 = $12,000), and as shown in the example, the value that has been recognized in the books was only $10,000, so an entry that proves the value of the due amount of $ 2,000 would be recorded. For instance, if you decide to prepay your rent in January for the entire year, you will need to record the expense … Assume a company pays payroll on the first of every month for the previous month’s work. For instance, an entry for a purchase or a sale made on the last day of the fiscal period is not an adjusting entry. Explain the use of and prepare the adjusting entries required for prepaid expenses, depreciation, unearned revenues, accrued revenues, and accrued expenses. It would need to accrue one month’s payroll expense at the end of the year. The perks of such expenses are yet to be utilised in a future period. Although the expense is being paid on January 1, it was owed to the employees at the end of December. Classification of Adjusting Entries. The accounting for office or store supplies is similar to prepaid or unexpired expenses. At the end of each of the following 5 months the adjusting entry will debit Insurance Expense for $400 and will credit Prepaid Insurance for $400 Either method for recording prepaid expenses could be used as long as the asset account balance is equal to the unexpired or unused cost as … Accruals are adjusting entries used to accelerate the recognition of an item. Prepaid expenses also need to be recorded as an adjusting entry. Recording the adjusting entry on 31/12/2015. Prepaid expense acts like an asset and.. Journal Entry for Prepaid Expenses Prepaid expenses are those expenses which are paid in advance for a benefit yet to be received. Making adjusting entries is a way to stick to the matching principle—a principle in accounting that says expenses should be recorded in the same accounting period as revenue related to that expense. Each month, an adjusting entry will be made to expense $10,000 (1/12 of the prepaid amount) to the income statement through a credit to prepaid insurance and a debit to insurance expense. Adjusting journal entries can be classified into three main types: Prepayments; Prepaid expenses – money paid in advance for unused yet assets; If you granted the discount, you could post an adjusting journal entry to reduce accounts receivable and revenue by $250 (5% of $5,000). Prepaid expenses journal entry Create a prepaid expenses journal entry in your books at the time of purchase, before using the good or service. The journal entry for prepaid expenses involves two accounts: prepaid expense a/c and expense a/c. On December 31, 2018, Company Y Ltd paid the salaries for January 2019, amounting to $ 10,000 in advance to the employees of the company. At the end of an accounting period, before financial statements can be prepared, the …