1	PRINCIPLES OF ACCOUNTING Preparing Adjustments Part B
2	PREPAYMENTS Prepaid Expenses are assets that result when a company pays in advance for an expense Usually Prepaid Expenses expire over time Common examples include Prepaid Insurance and Prepaid Rent
3	PREPAYMENTS Only a fraction of prepayments are expensed The fraction equals the number of periods that have passed, divided by length of time covered by the prepayment Past Months / Total Months
4	Prepaid Insurance Example On October 1^st the company paid the annual insurance premium of $3,600 How many months of the insurance have expired by December 31^st? Click the answer below
5	Expired Insurance
6	CORRECT! 3 months had passed Total original term or length of time was twelve months 3/12 = .25
7	Adjustment Amount
8	CORRECT!
9	Adjustment Entry
10	CORRECT!
11	Adjustment Entry
12	CORRECT!
13	Adjustment Entry
14	Unearned Revenue Unearned Revenue results when customers pay in advance for goods or services Until it is earned, companies owe the prepayments back to the customers So Unearned Revenue is a liability
15	Example of Unearned Revenue Landlords require the last month’s rent in advance But landlords have to return the money if the tenants pay all of their rental payments So Unearned Rental Revenue is a liability
16	Other Examples of Unearned Revenue Magazines charge for subscriptions before mailing copies Attorneys collect retainers before providing legal services
17	Accrued Expenses Accrue unrecorded expenses Debit the expense Credit the liability The liability is usually a “payable” such as Wages Payable, Interest Payable, or Taxes Payable
18	Accrued Wages Example Wages of $750 are paid on Friday for a Monday through Friday workweek, but the year ends on Thursday so the wages have not been recorded Adjustment fraction equals the days that have passed divided by the total days Monday through Thursday equals four days Four days divided by the five day workweek (4/5) equals .80 Adjustment amount of $600 is computed by .80 times $750 (.80 * 750 = $600)
19	Accrued Wages Adjustment Entry
20	Balances Information to compute balances is provided for some adjustments Then the adjustment amount is the difference between the account balance and the actual balance
21	Supplies Example The beginning balance of supplies was $240 Then the company purchased $600 of supplies But only $300 of supplies were left to be counted during the year end inventory
22	Supplies Account Balance First add the beginning balance and the purchases ($240 + $600) to compute the account balance of $840 Then subtract the actual amount of $300 from the account balance Thus the adjustment amount is $540 ($840 - $300)
23	Adjustment Entry
24	Prepaid Rent Example
25	CORRECT Four months passed from July 1^st to October 31^st 1. July 2. August 3. September 4. October
26	Prepaid Rent
27	CORRECT!
28	Unearned Revenue
29	CORRECT! The initial payment of $2,600 minus the $1,200 balance equals $1,400
30	Income Statement Account
31	CORRECT The key word “fees” points to the Income Statement account “Fees Earned”
32	Balance Sheet Account
33	CORRECT!