JournaldrillPrepaid expense adjustment
A prepaid expense is recorded as an asset when paid (Dr Prepaid Insurance / Cr Cash). At the end of each period an adjusting entry moves the part that has been used up to expense: debit the expense and credit the prepaid asset for the amount expired.
Syntax
Dr Insurance Expense (or Rent Expense, Supplies Expense) / Cr Prepaid Insurance (or Prepaid Rent, Supplies)| Part | What it is |
|---|---|
Prepaid Insurance / Prepaid Rent | Asset debited when the payment is made, credited each period as coverage or occupancy expires. |
Supplies | Asset for supplies bought; the adjustment moves the amount used (purchased minus on hand) to expense. |
Insurance Expense / Rent Expense / Supplies Expense | Expense debited for the portion consumed in the period. |
Examples
Jan 1: Dr Prepaid Insurance 2,400 / Cr Cash 2,400; Jan 31 adjust: Dr Insurance Expense 200 / Cr Prepaid Insurance 200Result: Expense 200 for January, prepaid balance 2,200 remaining
A 12-month policy costs 2,400, so 200 expires each month.
Dr Rent Expense 1,500 / Cr Prepaid Rent 1,500Result: Expense up 1,500, assets down 1,500
Three months of rent (4,500) paid in advance; one month has passed.
Dr Supplies Expense 600 / Cr Supplies 600Result: Expense 600, Supplies asset down to 300
Supplies bought during the year 900; count at year end shows 300 on hand, so 600 were used.
Common mistakes
- Expensing the whole prepayment on the day it is paid: only the portion that applies to the current period is expense; the rest is an asset.
- Crediting the supplies account for the amount on hand instead of the amount used: the adjustment is purchases minus the physical count.
- Skipping the adjustment at month end: without it expenses are understated and assets overstated, so net income is too high.
Practice Prepaid expense adjustment
These drills check your answer on live data, free, no account needed.
- Prepaid insurance usedOn August 1, Oak Hill Auto Repair paid $3,600 for a 12-month insurance policy and debited Prepaid Insurance. Record the adjusting entry needed on December 31, the end of its accounting year.
- Prepaid rent usedOn October 1, Willow Florist paid $7,200 in advance for six months of shop rent and debited Prepaid Rent. Record the adjusting entry on December 31.
- Supplies usedBluebird Graphic Design started the month with a $640 balance in Supplies and bought $1,150 of supplies during the month, debiting Supplies. A count at month end shows $410 of supplies still on hand. Record the adjusting entry.
Questions
Is prepaid insurance an asset or an expense?
It is a current asset when paid. It becomes Insurance Expense gradually as each month of coverage passes.
What type of adjusting entry is a prepaid expense?
A deferral: cash was paid before the expense was incurred, so the adjustment defers recognition of the expense until it is used.
How do I calculate the supplies adjustment?
Beginning supplies plus purchases minus supplies on hand at the count equals supplies used, which is the expense.
Related
- Unearned revenueHow to record a customer prepayment as a liability (Dr Cash, Cr Unearned Revenue) and recognize revenue as earned (Dr Unearned Revenue, Cr Revenue).
- Accrued wagesHow to record wages employees earned by period end but are paid later: Dr Wages Expense, Cr Wages Payable. With the payday entry and reversing entry.
- Depreciation entryHow to record depreciation: Dr Depreciation Expense, Cr Accumulated Depreciation. Straight-line formula, monthly and annual examples and book value.
- Closing entriesHow to close the books: close revenues and expenses to Income Summary, close Income Summary to Retained Earnings, then close Dividends. Worked example.