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Acct1501 - 2-6

Accounting and Financial Management 1A (University of New South Wales)

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Business School
ACCT1501 Accounting and Financial Management 1A
Session 1 2016

TUTORIAL WEEK 2 Solutions to Tutorial Questions

Tutorial Questions:
DQ1.2, 1.15, P1.7, P1.12, P1.24

DQ1.2 Financial performance means generating new resources from day-to-day operations
over a period of time. Financial position is the organisation’s set of financial resources and
obligations at a point in time.

DQ1.15
Accounting entity: under this concept the accounting entity is separate and distinguishable
from its owners. For example, the accounting entity of a sole trader is differentiated from the
financial affairs of the owner. Similarly, a company is a separate entity from its shareholders.
If either the sole trader or a shareholder of a company goes out and buys a new set of golf
clubs, it may affect their personal finances but does not affect the accounting entity.
Accounting entities do not necessarily correspond to legal entities. For example, as noted
above the personal financial affairs of the sole trader can be separated from the finances of
the business, even though there is no legal distinction. This concept puts a boundary on what
transactions are to be recorded for any particular accounting entity. It also allows the owner
to evaluate the performance of the business.

Accounting period: the life of a business needs to be divided into discrete periods to
evaluate performance for that period. Dividing the life of an organisation into equal periods
to determine profit or loss for that period is known as the accounting period concept. The
time periods are arbitrary but most organisations report at least annually, with large
companies preparing half-yearly and quarterly financial statements for outside purposes and
at least monthly (sometimes more frequently) for management purposes.

Monetary: accounting transactions need to be measured in a common denominator that in


Australia is, not surprisingly, the Australian dollar. This allows comparisons across periods
and across different companies. Transactions that cannot be reasonably assigned a dollar
value are not included in the accounts. This concept also assumes that the value of the
monetary unit is constant over time, which ignores inflation.

Historical cost: under this concept, assets are initially recorded at cost. As you will see in
later chapters many assets such as inventory will still be recorded at cost in the Balance Sheet
in subsequent periods even though their value has increased. Some other assets such as
property, plant and equipment can be revalued periodically. Thus, in reading a Balance Sheet
it is important to note at what valuation the assets are being recorded.

Going concern: financial statements are prepared on the premise that the organisation will
continue operations in the foreseeable future. If this is not the case then it is necessary to
report the liquidation values of an organisation’s assets.
1

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Materiality: under this concept, all transactions are recorded, but items that have a small
dollar value are expensed rather than included as an asset on the Balance Sheet. For example,
a box of pens that costs $13 and has a useful life of two years would be treated as a stationery
expense rather than as an asset.

P1.7

Sales
Cash sales 550,000
Credit sales 370,000
Total sales 920,000

Expenses
Total expenses (410,000 + 230,000) 640,000

Accrual profit = Total sales – Total expenses


= 920,000 – 640,000
= 280,000

P1.12

Item Asset Liability Shareholders’ Revenue Expense


Equity
Administrative expenses
Cash at bank
Marketing expenses
Buildings
Income taxes payable
Loans from banks
Accounts payable
Retained profits
Accounts receivable
Income tax expense
Cost of goods sold
Sales Revenue
Inventories

P1.24

Shareholders’ equity = Assets – Liabilities


= ($2,800,000 + $340,000 + $410,000)
- ($250,000 + $600,000 + $104,000)
= $3,550,000 - $954,000
= $2,596,000

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Business School
ACCT1501 Accounting and Financial Management 1A
Session 1 2016

TUTORIAL WEEK 3 Solutions to Tutorial Questions


Tutorial Questions:
DQ 2.6, 2.20, P2.8, P2.10, P2.13, P2.18

DQ2.6
a A balance sheet can indicate whether a company is financially sound by a comparison of
the amount of finance raised by debt with the amount raised from owners. The higher the
proportion raised by the debt, the higher the risk to the creditors.
b The working capital, i.e. current assets less current liabilities indicates a company’s
ability to pay its bills on time. This assumes that the current assets can be readily turned into cash.
c To declare a dividend a company must have adequate cash (or overdraft facilities) and
adequate retained profits. The decision will be influenced by shareholder expectations.
d The age of equipment can be ascertained by comparing cost of equipment to accumulated
depreciation.

DQ2.20
Those that are current need to be repaid within one year or refinanced. This is where the
immediate pressure is.

P2.8
Finewines Limited
Balance sheet as at 30 June 2016
Assets $ LiaBilities $
Cash 4,340 Accounts payable 10,680

Inventory of grapes 9,800 Shareholders’ equity


Accounts receivable 10,460 Share capital 40,000
Kitchen equipment 50,800 Retained profits 24,720
Total shareholders’ 64,720
equity

Total liabilities and


Total assets 75,400 shareholders’ equity 75,400
• Net profit for the year (which is not distributed as dividends) is technically called ‘retained
profits’ on the balance sheet, and is a type of shareholders’ equity.
• Accounts payable is a liability, not an asset.
• Accounts receivable is an asset, not a liability.
• Kitchen equipment is an asset, not shareholders’ equity nor a liability.
• Liabilities and share capital should be separately categorised.

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• Individual totals for each of: assets, liabilities and owners’ equity should be calculated and
displayed (unless there is only one or no items in a category, in which case the total is
obvious).
• Totals for each side of the balance sheet should be calculated (to check it balances).
• Dollar signs should be displayed to indicate that the numbers represent dollars.

P2.10
1
Century Cinemas
Income Statement
For the year ended 31 DecemBer 2016
$ $
Ticket revenue 81,700
Confectionery sales 12,300
Less Cost of confectionery sold (10,500)
Gross profit 83,500
Less operating expenses
Advertising expense 42,780
Rent expense 33,200
Electricity expense 5,090 (81,070)
Net profit 2,430

2
Century Cinemas
Statement of retained profits
For the year ended 31 DecemBer 2016
$
Retained profits, 1 January 2016 59,720
Net profit for 2016 2,430

Retained profits, 31 December 2016 62,150

3
Century Cinemas
Balance Sheet as at 31 DecemBer 2016
Current assets $ Current liaBilities $
Cash 4,610 Accounts payable 13,910
Accounts receivable 13,450
Inventory 18,000 Noncurrent liaBilities
36,060 Loan payable 35,000
Noncurrent assets Total liaBilities 48,910
Furniture and fittings 34,000 Shareholders’ equity
Land and buildings 60,000 Share capital 60,000
Projection equipment 41,000 Retained profits 62,150
135,000 122,150

Total assets 171,060 Total liaBilities and shareholders’ 171,060


equity

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P2.13
Assets Liabilities Shareholders’ equity Notes
1 Increase NE Increase
2 Increase Increase NE
3 NE NE NE Assets increased and decreased
4 Increase Increase NE
5 NE NE NE Assets increased and decreased
6 Decrease Decrease NE
7 NE NE NE Assets increased and decreased
8 Increase Increase NE
9 Increase NE Increase

P2.18
Revenue for the month of February 2016
$
1 Sales – credit 100,000
2 Sales – cash 150,000
3 Rental revenue 5,000
4 –
5 –
Total revenue 255,000

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Business School
ACCT1501 Accounting and Financial Management 1A
Session 1 2016

TUTORIAL WEEK 4 Solutions to Tutorial Questions

Tutorial Questions:
DQ 3.3, 3.6, 3.9, P3.6, P3.12, P3.20

DQ3.3
Revenues increase profit, and profit increases retained profits, which is a part of shareholders’
equity. It is likely that revenues (sales) also increase an asset, such as cash, or accounts
receivable.

DQ3.6
• Assets normally have a debit balance, whilst liabilities and equity normally have a credit
balance. Revenues have a credit balance, and expenses have a debit balance
• Therefore, some examples of accounts that normally have a debit balance are:
– Cash
– Accounts receivable
– Inventory
– Furniture, fittings & fixtures
– Land & buildings
– Investments
– Intangibles
– Prepayments
• Some liability accounts that normally have a credit balance are:
– Accounts payable
– Loan
– Other payables (income tax, wages, etc.)
– Revenue received in advance (unearned revenue)
– Mortgage
– Provisions
• Some equity accounts that normally have a credit balance are:
– Share capital
– Retained profits
– Reserves
• Some revenue accounts that have a credit balance are:
– Sales
– Dividends received from investments
– Other revenue
• Some expense accounts that normally have a debit balance are:
– Electricity expense
– Income tax expense
– Salaries and wages expense
– Rent expense

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– Sundry expenses
– Depreciation expense

DQ3.9
a. Woolworths – cost of goods sold, transport expense, wages
b. Commonwealth Bank – interest expense, rent expense
c. Red Cross Charity – telephone costs, wages (e.g. counsellors, administration)
d. Australian Navy – fuel, maintenance

P3.6
Retained profits 30/6/16 = Retained profits 1/7/15 + Net profit –Dividends
= 200 + 150 – 50
= 300
Liabilities 1/7/15 = Assets – (Share capital + Retained profits)
= 600 – (180 + 200)
= 220
Assets 30/6/16 = Liabilities + (Share capital + Retained profits)
= 300 + (190 + 300)
= 790

P3.12
1 Revenue $
Sales 70,000
Interest Revenue 8,000
78,000

2 Expense
Depreciation (50% *200,000* 20%) 20,000
Rent 4,000
Interest (200,000*10%*50%) 10,000
COGS 30,000
Salaries (10,000 + 3,000) 13,000
77,000

P3.20
Dragons Ltd
Journal entries
1
Dr Accounts receivable 200,000
Cr Sales revenue 200,000

2
Dr Cash 6,000
Cr Sales revenue 6,000

3
Dr Cash 150,000
Cr Accounts receivable 150,000

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4
Dr Inventory 70,000
Cr Accounts payable 70,000

5
Dr Accounts payable 50,000
Cr Cash 50,000

6
Dr COGS 80,000
Cr Inventory 80,000

7
Dr Wages expense 90,000
Cr Wages payable 90,000

8
Dr Wages payable 22,000
Cr Cash 22,000

9
Dr Tax payable 6,000
Cr Cash 6,000

10
Dr Retained Profits 20,000
Cr Cash 20,000

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Dragons Ltd
Income Statement for the iear ended 30 June 2016
$
Sales revenue 206,000
Less: Cost of goods sold (80,000)
Gross profit 126,000

Less: Other expenses


Wages expense (90,000)
Net profit 36,000

Dragons Ltd
Note of changes to retained profits for the iear ended 30 June 2016
$
Retained profits, 1 July 2015 34,000
Net profit after tax 36,000
70,000
Dividends declared (20,000)
Retained profits, 30 June 2016 50,000

Dragons Ltd
Balance Sheet as at 30 June 2016
$
Current assets
Cash 72,000
Accounts receivable 86,000
Inventory 32,000

Total assets 190,000

Current liabilities
Accounts payable 32,000
Inco5e tax payable 0
Wages payable 68,000
Total liabilities 100,000

Shareholders’ equiti
Share capital 40,000
Retained profits 50,000
Total shareholders' equiti 90,000

Total liabilities and shareholders’ equiti 190,000

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Business School
ACCT1501 Accounting and Financial Management 1A
Session 1 2016

TUTORIAL WEEK 5 Solutions to Tutorial Questions


Tutorial Questions:
DQ 4.3, 4.7, 4.9, P4.18, P4.19, Case 3B*

DQ4.3
A chart of accounts is a listing of the titles of all the accounts of an entity. Each account is
assigned a number.

DQ4.7
Closing entries formally transfer the balances of the revenue and expense accounts to a profit
and loss summary and then to retained profits. Closing entries also reset the revenue and
expense account balances to zero to begin recording these items for the next accounting period.

DQ4.9
The basic point is that accounting records and financial statements need not be complex or
expensive to be useful. Every manager needs to know how the business is performing and to
be able to explain that to bankers and others. This performance goes beyond mere sales
records, even if sales are the lifeblood of the firm. The accounting system provides
information about profitability, cash flows, debts and other factors important to the business
besides sales. Bankers and tax authorities want to know about such things, even if the
businessman claims not to.

It should be said also that the entrepreneur mentioned may well have an accounting system
that fits the modest needs of his/her business well. He/she understands cost-benefit:
accounting, like everything else, should be worth its cost. But he/she should ask
himself/herself if he/she could be a better manager if he/she had more information, and
perhaps accounting could help him/her there.

P4.18
1
Morilla Ltd
General journal

$ $
(a) Dr Inventory 8,250
Cr Accounts tayable 8,250

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(b) Dr Accounts Receivable 11,000


Cr Sales 11,000
Dr COGS 7,700
Cr Inventory 7,700

(c) Dr Cash 19,000


Cr Accounts Receivable 19,000

(d) Dr Accounts tayable 11,000


Cr Cash 11,000

(e) Dr Misc. Expenses 1,500


Cr Cash 1,500

(f) Dr Salaries Expense 2,600


Cr Cash 2,600

(g) Dr Depreciation Expense 200


Cr Accumulated Depreciation 200

(h) Dr Long-term loan 800


Cr Cash 800

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2 Posting to the ledger accounts

Cash
31/1/16 Opening balance 21,000 Accounts payable 11,000
Feb/16 Accounts receivable 19,000 Misc. expenses 1,500
Salaries expense 2,600
Long-term loan 800

Accounts receidable
31/1/16 Opening balance 25,000 Feb/16 Cash 19,000
Sales 11,000

Indentory
31/1/16 Opening balance 36,000 Feb/16 COGS 7,700
Feb/16 Accounts payable 8,250

Equipment
31/1/16 Opening balance 24,000

Accumulated depreciation
31/1/16 Opening balance 3,000
Feb/16 Depreciation expense 200

Accounts payable
Feb/16 Cash 11,000 31/1/16 Opening balance 13,000
Feb/16 Inventory 8,250

Long-term loan
Feb/16 Cash 800 31/1/16 Opening balance 49,000

Share capital
31/1/16 Opening balance 30,000

Retained profits
31/1/16 Opening balance 11,000

Sales
Feb/16 Accounts receivable 11,000

COGS
Feb/16 Inventory 7,700

Misc. expenses
Feb/16 Cash 1,500

Salaries expense
Feb/16 Cash 2,600

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Depreciation expense
Feb/16 Accumulated
depreciation 200

3
Morilla Ltd
Trial balance at end February 2016

$ $
Cash 24,100
Accounts receivable 17,000
Inventory 36,550
Equipment 24,000
Accumulated depreciation 3,200
Accounts payable 10,250
Long-term loan 48,200
Share capital 30,000
Retained profits 11,000
Sales 11,000
COGS 7,700
Misc. expenses 1,500
Salaries expense 2,600
Depreciation expense 200

113,650 113,650

4 Preparing closing entries


$ $
Dr Sales 11,000
Cr trofit and loss summary 11,000

Dr trofit and loss summary 12,000


COGS 7,700
Misc. expenses 1,500
Salaries expense 2,600
Depreciation expense 200

Dr Retained profits 1,000


Cr trofit and loss summary 1,000

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5
Morilla Ltd
Income Statement for February 2016

$ $
Sales 11,000
Cost of goods sold (7,700)
Gross profit 3,300
Operating expenses
Salaries expense 2,600
Misc. expenses 1,500
Depreciation expense 200
(4,300)

Net loss (1,000)

Morilla Ltd
Balance Sheet as at 28 February 2016

Assets
Current assets
Cash 24,100
Accounts receivable 17,000
Inventory 36,550
77,650
Noncurrent assets
Equipment 24,000
Accumulated depreciation (3,200)
20,800
Total assets 98,450

Liabilities and shareholders’ equity


Current liabilities
Account payable 10,250
Noncurrent liabilities
Long-term loan 48,200
58,450

Shareholders’ equity
Share capital 30,000
Retained profits 10,000
40,000
Total liabilities and shareholders’ equity 98,450

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P4.19
Dr Cr
$ $
a Cash 30,000
Share capital 30,000
Issue of shares for cash. (Number of shares unknown.)

b Inventory 5,000
Accounts payable 5,000
turchases of inventory, on credit.

c Equipment 3,600
Cash 1,200
Notes payable 2,400
turchase of equipment, partly for cash.

d Supplies expense 700


Accounts payable 700
Supplies expense, not yet paid for.

e Accounts receivable 900


Sales revenue 900
Credit sales.

Cost of goods sold 540


Inventory 540
Cost of the goods sold on credit.

f Cash 1,300
Accounts receivable 1,400
Sales revenue 2,700
Credit sales with down payment.

Cost of goods sold 1,620


Inventory 1,620
Cost of the goods sold with down payment.

g Cash 650
Accounts receivable 650
Collections on customer accounts.

h Accounts payable 1,000


Cash 1,000
tayments to suppliers.

i Supplies 300
Supplies expense 300
Supplies on hand at end of the month.

j Interest expense 60
Notes payable 500
Cash 560
To record payment of interest and principal on notes.

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Case 3B*
This is an open question. Students should pick a company and go to its website to answer the
questions. Individual answers depend on the company chosen.

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Business School
ACCT1501 Accounting and Financial Management 1A
Session 1 2016

TUTORIAL WEEK 6 Solutions to Tutorial Questions

Textbook Ch. 5 Accrual Accounting Adjustments


 Discussion Questions DQ 5.10, DQ5.17
 Problems P5.10, P5.14, P5.16

DQ5.10 – Unearned revenue

A large airline (e.g. Qantas) records unearned revenue where customers have paid for flights in
advance. At the time customers pay for flights the airline records a liability because it has an
obligation to make a future sacrifice of economic benefits. When the flight services have been
provided by the airline the unearned revenue is transferred to revenue. In the case of a large
airline, revenues and profit are recognised based on the services provided to passengers during
the period. Profit is measured as revenue less the expenses incurred in providing the service.

In a cash accounting system, only transactions that involve an immediate cash inflow or outflow
are recognised. Cash flows are simple to understand but do not provide a satisfactory measure of
the financial performance of most enterprises.

Accrual accounting employs wider criteria to decide whether revenue has been realised or
expense has been incurred and this provides more useful information about the financial
consequences of all transactions and events that relate to the period.

The purpose of accrual accounting adjustments is to make the financial statements as reliable as
possible. The intention is to identify with each accounting period the revenue earned in that
period and to determine the expenses associated with generating the period’s revenue. The
difference between the revenue and expense for the period then represents the profit or loss for
the period. Thus the adjustments augment the cash-based figures to implement accrual
accounting.

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DQ5.17 – Year-end adjustments

a An expense is debited and a liability is credited

Dr Interest expense
Cr Interest payable

Dr Wage expense
Cr Wages payable

Dr Rent expense
Cr Accrued rent

b An expense is debited and an asset contra account is credited

Dr Depreciation expense - plant


Cr Accumulated depreciation – plant

Dr Amortisation expense - licence


Cr Accumulated amortisation – licence

Dr Bad and doubtful debts expense


Cr Allowance for doubtful debts

c An asset is debited and revenue is credited

Dr Accounts receivable
Cr Sales revenue

Dr Interest receivable
Cr Interest revenue

Dr Commission receivable
Cr Commission revenue

d A liability is debited and revenue is credited

Dr Unearned revenue
Cr Sales revenue

Bonus question: An expense is debited and an asset is credited

Dr Insurance expense
Cr Prepaid insurance

Dr Office supplies expense


Cr Office supplies

Dr Cost of sales
Cr Inventory

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Problem 5.10 – Super Office Supplies Ltd


1 Inventory purchase on last day of the year

Dr Inventory $13,100
Cr Accounts payable $13,100

2 Major sales order filled on last day of the year

Dr Accounts receivable $7,200


Cr Sales revenue $7,200
Dr Cost of sales $3,300
Cr Inventory $3,300

3 No entry necessary for change in share price

4 Correct error in depreciation expense

Dr Depreciation expense $14,500


Cr Accumulated depreciation $14,500

5 Increase warranty liability

Dr Warranty expense $780


Cr Provision for warranty $780

6 No entry necessary for increase in future wages but may need to adjust provision for
employee entitlements such as annual leave and long service leave.

7 Correct error for insurance expense (2,400 x 10/12)

Dr Prepaid insurance $2,000


Cr Insurance expense $2,000

8 Correct error for sales revenue

Dr Sales revenue $400


Cr Deposit liability (unearned revenue) $400

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Problem 5.14 – Parkes Ltd

Correction to Question – Point c. On 1 October 2015 Parkes paid a one-year premium for fire
insurance.

1 Transaction Analysis

Assets Liabilities Revenues Expenses


a. NE +500 NE +500
b. NE -11,200 +11,200 NE
c. -13,500 NE NE +13,500
d. NE +38,000 NE +38,000
e. NE +6,000 NE +6,000
f. -3,000 NE NE +3,000

2 Adjusting Journal Entries

a. Accrual for interest payable at end of the year, $40,000 x 5% x 3/12 months

Dr Interest Expense $500


Cr Interest Payable $500

b. Unearned rent revenue realised as rent revenue, $16,800 x 4/6 months

Dr Unearned Revenue $11,200


Cr Rent Revenue $11,200

c. Prepaid insurance is used up and becomes insurance expense, $18,000 x 9/12


months

Dr Insurance Expense $13,500


Cr Prepaid Insurance $13,500

d. Accrual for wages payable at end of the year, $38,000

Dr Wages Expense $38,000


Cr Wages Payable $38,000

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e. Accrual for electricity costs, $6,000

Dr Electricity Expense $6,000


Cr Accrued Expenses $6,000
(Other Creditors)

f. Office supplies are used up and become office supplies expense,


$1,400 + $2,400 - $800 = $3,000

Dr Office Supplies Expense $3,000


Cr Office Supplies $3,000

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Problem 5.16 – MNO Ltd

1. Prepaid insurance is used up and becomes insurance expense, $6,000 x 3/12 months

Dr Insurance Expense $1,500


Cr Prepaid Insurance $1,500

2. Balance of prepaid insurance at 30 June is $4,500

1 April: Recognition of prepaid insurance

Dr Prepaid Insurance $6,000


Cr Cash $6,000

30 June: Adjusting entry

Dr Insurance Expense $1,500


Cr Prepaid Insurance $1,500

T account

Prepaid insurance
Opening Balance 0 Insurance Expense 1,500
Cash 6 000 Closing Balance 4,500

6 000 6 000

3. If no adjusting entry was made

Net profit = Revenues less Expenses

If no adjusting entry, then insurance expense would not be recorded.

Expenses would be understated by $1,500 and net profit would be overstated by $1,500

Prepaid insurance (asset) would also be overstated by $1,500.

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4. Adjusting entries if prepayments are recorded as expenses instead assets

In ACCT 1501 and in the textbook, the usual approach is as follows: A prepayment is initially
recognised as an asset. Then at the end of the period the asset balance is adjusted and an
expense is recognised for the amount of the prepayment that has been used up. An example of
this approach is shown at Part 2 of this question. The usual approach is consistent with the
accounting concepts of asset and expense. An asset has future economic benefits. An expense is
a decrease in economic benefits from outflows or depletions of an asset.

It is possible to use an alternative approach, where a prepayment is initially recognised as an


expense and then an adjusting entry is made at the end of the period to recognise the balance of a
prepaid asset .

1 April: Recognition of prepayment as expense

Dr Insurance Expense $6,000


Cr Cash $6,000

30 June: Adjusting entry

Dr Prepaid Insurance $4,500


Cr Insurance Expense $4,500

T account

Prepaid insurance
Opening Balance 0
Insurance Expense 4 500 Closing Balance 4,500

4 500 4 500

Do you see how we end up with the same insurance expense and prepaid insurance at the end of
the period?

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