PREPAYMENT JOURNAL ENTRY
Prepayment is assets that represent cash paid in advance for goods or services to be received later. Some common prepayment assets are rent, insurance policies, utility bills, and interest expenses. A prepayment is usually related to unearned income. This prepaid expense is an asset. Once the item is used, it becomes an expense. Following journal entry rules, assets and expenses are usually increased by debit and reduced by credit. During journal entry for prepaid expenses, if you debit your prepaid expense account, make sure to credit the corresponding account.
In the case where the prepaid item is used, the prepaid expense account is decreased, and the actual expense account is increased; Therefore, the expense account is debited, and the prepaid account is credited. The activity of adjusting these entries help balance financial books, adjusting entries usually are useful in recognizing prepaid expenses that have become actual expenses.
Adjusting entries is usually done at the end of the accounting period following accounting principles to meet the stipulated set of requirements set by authorities. These adjusting entries are classified into two: Deferral and Accrual, Deferral include transaction where a company receives cash before consumption. Prepaid expenses and unearned revenues come under deferrals when accounting adjustment is made. Accrual is the transaction where a company pays or receives payment after use. Accrued expenses and revenues when adjusting journal entries come under accruals.
These adjusting entries are essential because they are used to correctly allocate income and expense of a company in the same period in which transactions related to income and expenses took place. They also aid financial statement so that the company can report actual transactions following accounting principles.
REVERSAL JOURNAL ENTRIES
These journal entries are used to reverse or cancel our adjusting journal entries made at the end of the previous accounting period. The activity of reversing entries is necessary when past years accruals and prepayments are being paid off or used; thus, there is no need to record them as liabilities and assets. A reversing entry is linked to original adjusting entry and is written by reversing positions of credit with debit and vice versa.
Tip: Accruals are reversed in the next accounting period to prevent double-booking of expenses or revenue.
Apart from the usual journal entries, there is another kind of journal entry that involves transactions that have not been used and require adjusting them or, in some reversing them. Knowing which of these payments are assets and liabilities to be credited and debited are essential. Adjustment of these payments is vital in reporting transactions in the various financial statement. Knowing when to adjust when dealing with transactions of these nature may require a particular skill to pinpoint how to deal with them. We know this is not easy, that’s why we are ideal for you whenever you think who can do my accounting homework for me? Look no further, visit our page today and post your assignment to top your homework in your class.