prepaid+expense+and+adjustment

Adjusting Entries for Prepaid Expense There are two methods to do it: 1.

Asset Method
An example of asset method:@http://accounting-simplified.com/prepaid-expense.html

Prepaid expense is expense paid in advance but which has not yet been incurred. - See more at: http://accounting-simplified.com/prepaid-expense.html#sthash.xY4J6wOg.dpuf
 * Debit || Prepaid Rent || 10,000 ||  ||
 * Credit || Cash ||  || 10,000 ||
 * Credit || Cash ||  || 10,000 ||

The prepaid expense will be recognized as expense in the next accounting period to which the rental expense relates. Following accounting entry will be recorded in the year 2011:


 * Debit || Rent Expense (Income Statement) || 10,000 ||  ||
 * Credit || Prepaid Rent ||  || 10,000 ||
 * Credit || Prepaid Rent ||  || 10,000 ||

- See more at: http://accounting-simplified.com/prepaid-expense.html#sthash.xY4J6wOg.dpuf

__**Another Example:**__ Expenses are considered //incurred // when they are used, consumed, utilized or has expired. Because prepayments they are not yet incurred, they are not recorded as expenses. Rather, they are classified as **current assets **.

service supplies: Prepayment accoutAsset account


 * ~ Dec ||~ 7 || Service Supplies ||> 1,500.00 ||  ||
 * ~  ||~   || Cash ||   ||> 1,500.00 ||

In preparing the adjusting entry, The adjusting entry will include: (1) recognition of expense and (2) decrease in the asset initially recorded (since some of it has already been used). The adjusting entry would be: The "Service Supplies " is Asset -Prepaid expense
 * ~ Dec ||~ 31 || Service Supplies Expense ||> 900.00 ||  ||
 * ~  ||~   || Service Supplies ||   ||> 900.00 ||

2.

Expense Method
Under the expense method, the accountant initially records the entire payment as expense. If the expense method was used, the entry would have been:



DR. Expense Cr. Cash
 * ~ Dec ||~ 7 || Service Supplies Expense ||> 1,500.00 ||  ||
 * ~  ||~   || Cash ||   ||> 1,500.00 ||

Take note that the entire amount was initially expensed. If 60% was used, then the adjusting entry at the end of the month would be:(Adjustment) DR. Prepaied expense (Asset) CR. Expense with unused amounts of expense.
 * ~ Dec ||~ 31 || Service Supplies ||> 600.00 ||  ||
 * ~  ||~   || Service Supplies Expense ||   ||> 600.00 ||