Pattie's Event Planning Service records prepaid expenses as expenses when cash is paid out,and records unearned revenues as revenues when cash is collected.She then makes adjusting entries as needed to bring her books up to the full accrual basis once a year at the end of the year.This year on October 1,she paid out $3,600 for insurance for a one-year period.At the end of the year,she will make an adjustment entry that debits Insurance expense for $900.

Question

Quizplus · Accepted Answer

The adjusting entry should debit Prepaid Insurance for $900, not Insurance Expense. The $900 represents the portion of the insurance that has not yet been used (3 months of the 12-month policy), and should be recorded as a prepaid expense (asset) rather than an expense.

Pattie's Event Planning Service Records Prepaid Expenses as Expenses When