Adjusting journal entries are used to (you guessed it) adjust the balances in certain accounts due to the passage of time. Adjusting entries are made at the end of an accounting period.

Concept #1: Introduction to Adjusting Journal Entries

Concept #2: Adjusting Journal Entries: Prepaid Expenses (Accrual Accounting Method)

Concept #3: Adjusting Journal Entries: Prepaid Expenses (Cash Basis to Accrual Method)

Concept #4: Step-by-Step Process for Prepaid Expenses

Practice: On January 1, a company purchased a two-year insurance policy at $2,400 per year in cash. At this time, the company included the entire value of the policy in Prepaid Insurance. The coverage began immediately. The adjusting entry necessary when preparing the June 30 financial statements would include:

Practice: On January 1, a company signed a two-year rental agreement policy at $4,800 per year in cash. At this time, the company included the payment of the lease in Rent Expense. The lease began immediately. The adjusting entry necessary when preparing the June 30 financial statements would include:

Practice: The prepaid insurance balance on December 31, 2017 was correctly shown as $900. On April 1, 2018 an additional premium of $600 was paid by the company. The balance sheet at December 31, 2018 showed the appropriate amount of prepaid insurance as $500. The correct amount of insurance expense for 2018 would be:

Additional Problems
At the beginning of January, Langhurst Company paid $6,000 for insurance for the next four months beginning January 1, $3,000 for advertising to be run from February 1 to March 15, and $8,000 for rent over the next two months beginning January 1. What is the correct journal entry for recording a summary of these transactions? A) General and Administrative Expenses $17,000, Cash $17,000 B) General and Administrative Expenses $17,000, Accounts Payable 17,000 C) Prepaid Expenses $17,000, Cash $17,000 D) Prepaid Expenses $14,000, Advertising Expense $3000, Cash $17,000
In January, Langhurst Company paid $9,000 for utilities, repairs, and maintenance of delivery vehicles. Which of the following is the correct journal entry for recording this transaction? A) Other Expenses and Losses $9,000, Cash $9,000 B) General and Administrative Expenses $9,000, Accounts Payable $9,000 C) General and Administrative Expenses $9,000, Cash $9,000 D) Prepaid Expenses $9,000, Cash $9,000
A deferred expense would be shown on the balance sheet as: A) A receivable B) A payable C) A prepaid expense D) An unearned expense
If the accountant forgets to adjust the Prepaid Expenses account, there will be: A) an understatement of net income. B) an overstatement of net income. C) an overstatement of expense. D) no under- or overstatement of net income.
Adjusting entries: A) Usually are recorded on the first day of the month B) Always decrease expenses and decrease revenues C) Will usually affect one income statement account balance and one balance sheet account balance D) Always affect the balance in cash E) Two or more of the above are correct
The adjusting entry to recognize the portion of Prepaid Insurance used up during the period would include: a) a credit to Cash b) a credit to Insurance Payable c) a debit to Prepaid Insurance d) a debit to Insurance Expense
Accruals occur when cash flows: A) Occur before expense recognition. B) Occur after revenue or expense recognition. C) Are uncertain. D) May be substituted for goods or services.
On September 1, 20X4, Four Brothers Company pays $48,000 cash for six months rent. The balance in prepaid rent on December 31, 20X4, after adjustment, would be: A) $6,000 B) $24,000 C) $16,000 D) $12,000
Paying rent in advance for one full year would include a a. Debit to cash and a credit to accounts receivable b. Debit to supplies and a credit to accounts receivable c. Debit to prepaid rent and a credit to cash d. Debit to rent expense and a credit to cash
Prepaid insurance shows a beginning balance of $900 and an ending balance of $600. During the year, prepaid insurance was debited for $2,500. What is the amount of insurance expense shown on the current year’s income statement? a) $3,400 b) $2,200 c) $2,800 d) $1,600 e) $1,900
On July 1, 2011, Waterloo Company paid the premium in advance of $2,400 for a one-year fire insurance policy on an administrative building. At that time, the full amount paid was recorded as prepaid insurance. On December 31, 2011, the end of the accounting year, the required adjusting entry was not made. Which of the following is true? a) Gross Profit is overstated b) Liabilities are overstated c) Net Income is overstated d) Cost of Goods Sold is overstated e) Working Capital is understated
Up In Smoke purchased a two-year fire coverage policy on August 1, Year 3, and charged the entire $4,200 premium to Insurance Expense. When preparing the December 31, Year 3 financial statements, Up In Smoke would record which of the following adjusting entries? a) Debit Insurance Expense $875; Credit Prepaid Insurance $875 b) Debit Prepaid Insurance $875; Credit Insurance Expense $875 c) Debit Insurance Expense $875; Debit Prepaid Insurance $3,325; Credit Insurance Payable $4,200 d) Debit Prepaid Insurance $3,325; Credit Insurance Expense $3,325
Jorge opened his business on 6/1/15 and paid for a 12 month insurance policy in advance, for $2,400. Assuming no adjusting entries have been made, was adjusting entry must he make on 12/31/15? A. Debit: Prepaid Insurance $2,400 and Credit: Cash $2,400 B. Debit: Insurance Expense $1,200 and Credit: Cash $1,200 C. Debit: Insurance Expense $600 and Credit: Prepaid Insurance $600 D. Debit: Insurance Expense $1,400 and Credit: Prepaid Insurance $1,400
Paying rent in advance for one full year would include a a. Debit to cash and a credit to accounts receivable b. Debit to supplies and a credit to accounts receivable c. Debit to prepaid rent and a credit to cash d. Debit to rent expense and a credit to cash 
If Robert paid for 6 months of rent in advance on 7/1/16 for $4,800 ($800 per month).  What is the journal entry required on 7/1/16? a. Debit Rent Expense and Credit Prepaid Rent b. Debit Prepaid Rent and Credit Accounts Payable c. Debit Prepaid Rent and Credit Cash d. Debit Rent Expense and Credit Prepaid Liability
If Robert paid for 6 months of rent in advance on 7/1/16 for $4,800 ($800 per month).  What is the journal entry required on 12/31/16? a. Debit Rent Expense and Credit Prepaid Rent b. Debit Prepaid Rent and Credit Accounts Payable c. Debit Prepaid Rent and Credit Cash d. Debit Rent Expense and Credit Prepaid Liability
Making insurance payments in advance is an example of: a) An accrued revenue. b) An accrued expense. c) An unearned revenue. d) A prepaid expense.
If the prepaid expenses are not adjusted, assets on the balance sheet a) will be overstated. b) will be understated. c) will not be affected. d) may be either overstated or understated.