An adjusting journal entry is a journal entry made at the end of an accounting period to update accounts that are not accurately recorded, such as prepaid expenses or accrued revenue. This ensures that financial statements accurately reflect a company's financial position and performance. Adjusting entries are necessary because some transactions are not recorded as they occur.
Adjusting Journal Entry on December 31
When a company pays for an insurance policy in advance, the payment is initially recorded as a prepaid expense, which is an asset account on the balance sheet. This means that the cost of the insurance coverage is recorded as an asset because the company has not yet received the benefit of the insurance coverage.
However, as time passes and the insurance coverage is used up, the prepaid insurance account needs to be reduced and the insurance expense account needs to be increased. This is done through an adjusting entry at the end of the accounting period.
In this case, the adjusting entry is made on December 31st, which is the end of the accounting period. The first step is to calculate the number of months that have passed since the insurance payment was made. In this case, the insurance payment was made on April 1st, which means that 9 months have passed.
Next, we need to calculate the amount of insurance that has expired or been used up during these 9 months. We can do this by using the formula:
Expired insurance = Total insurance amount / Number of months covered * Number of months expired
In this case, the total insurance amount is $43,200, the number of months covered is 12, and the number of months expired is 9. Plugging these values into the formula, we get:
Expired insurance = $43,200 / 12 * 9 = $32,400
This means that $32,400 worth of insurance coverage has been used up during the 9 months since the payment was made.
Finally, we need to record the adjusting entry to recognize the expired insurance. The entry will decrease the Prepaid Insurance account by the amount of insurance that has been used up, and increase the Insurance Expense account for the same amount, which represents the cost of the insurance coverage that has been consumed during the period.
The entry would be:
Debit Insurance Expense: $32,400
Credit Prepaid Insurance: $32,400
This adjusting entry ensures that the company's financial statements accurately reflect the amount of insurance expense that was incurred during the period, and that the prepaid insurance account reflects the remaining amount of insurance coverage that has not yet been used up
Nature of adjusting journal entry https://brainly.ph/question/2605673
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ADJUSTING JOURNAL ENTRY
An adjusting journal entry is a journal entry made at the end of an accounting period to update accounts that are not accurately recorded, such as prepaid expenses or accrued revenue. This ensures that financial statements accurately reflect a company's financial position and performance. Adjusting entries are necessary because some transactions are not recorded as they occur.
Adjusting Journal Entry on December 31
When a company pays for an insurance policy in advance, the payment is initially recorded as a prepaid expense, which is an asset account on the balance sheet. This means that the cost of the insurance coverage is recorded as an asset because the company has not yet received the benefit of the insurance coverage.
However, as time passes and the insurance coverage is used up, the prepaid insurance account needs to be reduced and the insurance expense account needs to be increased. This is done through an adjusting entry at the end of the accounting period.
In this case, the adjusting entry is made on December 31st, which is the end of the accounting period. The first step is to calculate the number of months that have passed since the insurance payment was made. In this case, the insurance payment was made on April 1st, which means that 9 months have passed.
Next, we need to calculate the amount of insurance that has expired or been used up during these 9 months. We can do this by using the formula:
Expired insurance = Total insurance amount / Number of months covered * Number of months expired
In this case, the total insurance amount is $43,200, the number of months covered is 12, and the number of months expired is 9. Plugging these values into the formula, we get:
Expired insurance = $43,200 / 12 * 9 = $32,400
This means that $32,400 worth of insurance coverage has been used up during the 9 months since the payment was made.
Finally, we need to record the adjusting entry to recognize the expired insurance. The entry will decrease the Prepaid Insurance account by the amount of insurance that has been used up, and increase the Insurance Expense account for the same amount, which represents the cost of the insurance coverage that has been consumed during the period.
The entry would be:
Debit Insurance Expense: $32,400
Credit Prepaid Insurance: $32,400
This adjusting entry ensures that the company's financial statements accurately reflect the amount of insurance expense that was incurred during the period, and that the prepaid insurance account reflects the remaining amount of insurance coverage that has not yet been used up
Nature of adjusting journal entry https://brainly.ph/question/2605673
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