Accounting: The Language of Business - Vol. 2 (Intermediate: Part 39)

We should remember what a rapper like Tupac Shakur was doing, to a certain degree, who came from an experience of politicization very close to being a "Panther Baby". He knew, he came from that experience of the Black Panthers, and accounting for all his contradictions and process of growth, he achieved politically through gangsta rap things that no conscious rapper has achieved, such as establishing political, ethical, and moral codes between Crips and Bloods in the United States.

Bocafloja

Review of the Accounting Cycle (Part P)

by

Charles Lamson

Alternative Treatment of Deferred Revenues and Expenses

Depending on a company's accounting information system, prepaid expenses may initially be recorded as an expense instead of an asset. That is, the accounting information system could automatically debit all payments to insurers. landlords, and other payees to an expense account. Thus, if any prepaid amounts remain at the end of the year, assets are understated and expenses are overstated prior to the adjustment. In this case, the adjusting journal entry requires the creation of an asset for the unexpired portion of the prepaid asset and a reduction of the expense account for the same amount.

EXAMPLE 4A.1 Alternative Treatment of Prepaid Expenses

PROBLEM: FSU Corporation paid $3,000 on January 1 for a three-year insurance policy. the policy starts on January 1. FSU records all cash disbursements of this type by debiting an expense account as follows: 

Prepare the adjusting journal entry required on December 31.

 SOLUTION: The insurance expense and prepaid insurance accounts would appear as follows on December 31 before any adjustment is made:

 

On December 31, insurance expense is overstated because only one year of insurance coverage has expired, not three. There are two years of prepaid insurance remaining, meaning that prepaid insurance, the asset, is understated. In order to adjust the insurance expense and the prepaid insurance accounts, FSU must record the following adjusting journal entry:

After FSU posts the adjusting journal entry, the accounts will reflect the correct balance for the asset and the expense.

 in addition, companies may initially record revenues collected in advance as revenue rather than crediting a liability account. Prior to the adjustment, revenues are overstated and liabilities are understated. The adjusting journal entry requires recording a liability for the unperformed portion and reducing the revenue account to properly reflect the amount performed at the end of the reporting period. 

EXAMPLE 4A.2 Alternative Treatment of Unearned Revenue

 PROBLEM: Nancy Frank Realty collected $100,000 in advance for a one-year lease on June 30 of the current year. One half of the rent is earned by year end, December 31. 

On the date the rent was collected, Nancy Frank made the following journal entry.

 What adjusting journal entry is necessary on December 31?

SOLUTION: The rent revenue and unearned revenue accounts would appear as follows on December 31 before any adjustment is made:

On December 31, the revenue account is overstated and the liability account, unearned rent revenue, is understated because only one half of the advanced payment is performed at the end of the year. To adjust the rent revenue account, Nancy Frank must prepare the following adjusting journal entry:

 

After Nancy Frank posts the adjusting journal entries, the accounts will reflect the correct balances of the liability and revenue accounts.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 159-161*

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