Accounting Fundamentals | Adjusting Entries – Part 1 of 4: Prepaid Expenses

Mark Farber: Hi, I'' m Mark Farber as well as this
is Audit Principles, in our last video clip we talked concerning the distinction between cash
accountancy and also amassing audit. Before that we'' ve looked at a whole lot
of various purchases that a business does, generally on a day to day basis, so offering
income gets videotaped presently that it'' s sold.Purchasing things obtains recorded as you acquisition them but there ' s a bunch of access that have to be done at the end of each accounting duration, whether the period is
a month, quarter or a year, that are called readjusting access. Those belong to accruals. To put it simply, what we ' re attempting to do is balance off the repayment of money, against when things really occurred. When we in fact made revenue or whether we actually incurred costs.
We ' re mosting likely to in the following number of videos go with a bunch of different types of readjusting access, the very first one we ' re going to look at'it is something called pre-paid expenses. A pre paid expenditure is nothing more than an expenditure that a firm incurs where they spend for it beforehand, we have an example over here.ABC firm bought a one year insurance policy

plan on January first as well as they paid$ 2400 money for that policy. On January 1st if we were to tape this using cash audit, as well as remember cash bookkeeping we incur expenses as well as gain revenue just when cash modifications hands as well as to the level cash modifications hands. We would certainly attribute cash.For$ 2400. February, March, April. There ' d be no insurance cost.
You ' d have a big spike in the'first month of the year of expenditure, as well as then no insurance expense there after.
That ' s not truly what occurs. In February, we'' ll do the specific very same thing. Each month, we'' ll keep allowing out $200, $200,.
$ 200. Till by the end of the year, we'' ve incurred.
the whole $2400 of expenditure, all the pre paid expenditure which is a possession that rests on the.
annual report, will certainly have become an expenditure on the revenue statement.We ' ll spread it out throughout the years as opposed. to videotaping it all in one shot.
That ' s what prepaid costs are everything about. In our following video we ' ll take an appearance at the. turn around to this, or essentially the reverse to this which is unearned income.

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