Std. vs. Expedient - 1ADJUSTING JOURNAL

ENTRIESPrepayments/Deferrals

Cash flows that occur BEFORE expense and revenue recognition

Portion that applies to future periods is deferred as a prepaid expense or unearned revenue

Std. vs. Expedient - 2

Adjusting Entries for Prepayments/Deferrals

Recording Methods– Specific accounting policy of the entity

Standard vs. Expedient– Either method is acceptable– Nature of adjusting entries will differ

dependent on the original recording approach

Std. vs. Expedient - 3

PREPAYMENTS/DEFERRALS

Standard Recording Method

Records an asset upon payment of cash and liability upon receipt of cash before goods or services are provided

– Cash paid recorded as an asset (Prepaids)

– Cash received recorded as liability (Unearned revenue)

Std. vs. Expedient - 4

Prepayment - ExampleStandard Method

On 12/1/X5, your company paid $1,200 for a six-month insurance policy. The $1,200 was recorded as Prepaid Insurance (an asset).

What AJE is needed on 12/31/X5?

Std. vs. Expedient - 5

Collection in Advance - ExampleStandard Method

On 11/1/X5, your company received $2,400 for a six-month rental of our excess warehouse space. The $2,400 was recorded as Unearned rental revenue (a liability).

What AJE is needed on 12/31/X5?

Std. vs. Expedient - 6

Here comes something Here comes something that’s A LITTLE BIT that’s A LITTLE BIT

DIFFERENT!DIFFERENT!

Std. vs. Expedient - 7

PREPAYMENTS/DEFERRALS

Expedient

Recording Method

Records an expense upon payment of cash before goods or services are consumed

Records revenue upon receipt of cash before goods or services are provided

Std. vs. Expedient - 8

Prepayment ExampleExpedient Method

On 12/1/X5, your company paid $1,200 for a six-month insurance policy. The $1,200 was recorded as Insurance expense.

What AJE is needed on 12/31/X5?

Std. vs. Expedient - 9

Collection in Advance - ExampleExpedient Method

On 11/1/X5, your company received $2,400 for a six-month rental of our excess warehouse space. The $2,400 was recorded as Rental revenue.

What AJE is needed on 12/31/X5?

Std. vs. Expedient -

10

Standard vs. ExpedientOther Comments

Adjusting entries under the expedient method appear unusual– Debits to revenue accounts – Credits to expense accounts

Regardless of the recording method used, the ultimate financial statements will be the same!!

Std. vs. Expedient -

11

WOW!