00:01
Describe the appropriate adjusting entry for prepaid expenses and deferred revenues.
00:07
What is the effect on net income assets, liabilities, and equity of not recording adjusting entry for prepayments? so what this means is, let's talk about the initial entry and then we'll talk about the adjustment.
00:23
The initial entry for prepaid expenses would mean we are buying a prepaid expense.
00:30
Maybe it's prepaid insurance, maybe it's prepaid rent.
00:36
And we're paying ahead of time with cash.
00:40
Now, this is that we own, for example, an insurance plan if it was prepaid insurance.
00:45
If we don't adjust for it, then it will show we still have all of this on our books.
00:51
So the adjusting entry is a credit to prepaid insurance, prepaid rent, whatever it is.
00:58
And then we would debit the expense, rent expense, insurance expense, et cetera.
01:07
So what is the effect on net income if we didn't adjust this entry? net income would be overstated.
01:17
Assets would be overstated as well because we would show we have more still in this prepaid plan than has expired.
01:27
Liabilities would have no effect...