14.4 Accounting for Prepaid Expenses
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VCE Accounting Unit 3
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14.4 Accounting for Prepaid Expenses
- 2. © Michael Allison, Trinity Grammar School. Author’s permission required for external use On the day a prepaid expense is made, the full amount is to be treated as a Current Asset 14.4 ACCOUNTING FOR PREPAID EXPENSES 1 January Prepaid $4,000 for 4 months rent 1000 January February March April May June 1000 10001000 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Goes in the Sundries Column Not entered in the Rent Column
- 3. © Michael Allison, Trinity Grammar School. Author’s permission required for external use On the day a prepaid expense is made, the full amount is to be treated as a Current Asset Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Prepaid Rent [A] 31 Jan Bank 4000 GST Clearing [L] 31 Jan Bank 400 Bank [A] 31 Jan Prepaid Rent/GST 4400 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Bank [A] 31 Jan Prepaid Rent/GST 4400 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 Prepaid Rent [A] 31 Jan Bank 4000 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Rent Sundries GST 1 Jan Prepaid rent 101 4400 4000 400 GST Clearing [L] 31 Jan Bank 400 14.4 ACCOUNTING FOR PREPAID EXPENSES
- 4. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Once balance-day arrives, a balance-day adjustment must be made to record: 1. Expense – the amount that has been used up (consumed) 2. Asset – the amount that has not yet been used up (unconsumed) 1000 January February March April May June 1000 10001000 EXPENSE $3,000 ASSET $1,000 Balance-Day ASSET $1,000 • A resource controlled by the firm – it has a legal claim to April’s rent • Arising from a past event – the prepayment on 1 January • Will provide a future economic benefit – renting the property in April EXPENSE $3,000 • Outflow of economic benefits – the rent that has been consumed • There is a in Assets – the Prepaid Rent account • There is a in Owner’s Equity 14.4 ACCOUNTING FOR PREPAID EXPENSES
- 5. © Michael Allison, Trinity Grammar School. Author’s permission required for external use The balance-day adjustment to record this is done by “DEBITING THE EXPENSE” in the General Journal… Rent Expense [E] 31 Mar Prepaid Rent 3000 Prepaid Rent [A] 31 Jan Bank 4000 31 Mar Rent Expense 3000 General Journal Date Account DEBIT CREDIT 31 Mar Rent Expense [E] 3000 Prepaid Rent [A] 3000 General Journal Date Account DEBIT CREDIT 31 Mar Rent Expense [E] 3000 Prepaid Rent [A] 3000 Rent Expense [E] 31 Mar Prepaid Rent 3000 General Journal Date Account DEBIT CREDIT 31 Mar Rent Expense [E] 3000 Prepaid Rent [A] 3000 Prepaid Rent [A] 31 Jan Bank 4000 31 Mar Rent Expense 3000 14.4 ACCOUNTING FOR PREPAID EXPENSES
- 6. © Michael Allison, Trinity Grammar School. Author’s permission required for external use The expense account must be closed to calculate profit… Rent Expense [E] 31 Mar Prepaid Rent 3000 31 Mar Profit & Loss Summary 3000 3000 3000 General Journal Date Account DEBIT CREDIT 31 Mar Profit & Loss Summary [OE] 3000 Rent Expense [E] 3000 Profit & Loss Summary [OE] 31 Mar Prepaid Rent 3000 General Journal Date Account DEBIT CREDIT 31 Mar Profit & Loss Summary [OE] 3000 Rent Expense [E] 3000 Profit & Loss Summary [OE] 31 Mar Prepaid Rent 3000 General Journal Date Account DEBIT CREDIT 31 Mar Profit & Loss Summary [OE] 3000 Rent Expense [E] 3000 Rent Expense [E] 31 Mar Prepaid Rent 3000 31 Mar Profit & Loss Summary 3000 3000 3000 14.4 ACCOUNTING FOR PREPAID EXPENSES
- 7. © Michael Allison, Trinity Grammar School. Author’s permission required for external use The prepaid asset account must be balanced into next period… Prepaid Rent [A] 31 Jan Bank 4000 31 Mar Rent Expense 3000 Balance-Day 1000 January February March April May June 1000 10001000 EXPENSE $3,000 ASSET $1,000 Prepaid Rent [A] 31 Jan Bank 4000 31 Mar Rent Expense 3000 4000 4000 Prepaid Rent [A] 31 Jan Bank 4000 31 Mar Rent Expense 3000 31 Mar Balance 1000 4000 4000 Prepaid Rent [A] 31 Jan Bank 4000 31 Mar Rent Expense 3000 31 Mar Balance 1000 4000 4000 1 Apr Balance 1000 14.4 ACCOUNTING FOR PREPAID EXPENSES
- 8. © Michael Allison, Trinity Grammar School. Author’s permission required for external use TASK In-class Homework SQ6 X Ex14.4 X