A.PREPAID EXPENSES

This is an expense that is already paid but not incurred.

This is exactly the opposite of accrued expense. There are two methods or approaches that can be used in recording prepayments, namely: Expense Method and Asset Method.

a. Expense Method- under this method or approach, an expense
................account is debited upon payment of the prepaid expense.
................This method is also called “nominal approach” because
................an expense is an Income Statement accounts.

b. Asset Method- under this method or approach, an asset account is
................Debited upon payment of the prepaid expense, that’s why it is also called as the “real
................approach” for an asset account is a real account.

.................“in short ang prepaid expense ay parang prepaid load lang yan, pagkatapos ng isang araw ung ibang load mo gamit na so that’s ur expense, pero ung iba hindi pa and that makes ur assets, dba mas maganda kung pagbukurin ang expense at asset pra malaman mo kung ilan pang load ang pwede mo pang ipang text sakin ^_^V”
(yuck A.S.A nmn ako :D)

.................“pero if pagkatapos ng isang araw na un ubos na load nyo, natural wag na kaung magbalak magbukod, ala na nmn kau paghiwalayin eh :D, parang prepaid expense din when the accounting period ends, then lahat namn ng narecord mo na expense (take note ha expense) ay nagamit mo, wag ka na gumawa ng adjusting entry ala na kwenta un kasi la nmn kau paghihiwalayin na accounts, para lang po yan sa paghihiwalay ng expense mo sa asset mo pa nung pagdating ng end of accounting period, pero pag Asset account nirecord mo nung umpisa aun nid mo na mag adjusting kasi may asset ka pa ba, dba sabi ko ubos na so expense na un :D”

To Illustrate the difference bet 2 methods:

..........On June 2, 2008 Nobody Company paid 20,000Php for the
supplies purchased. At the end of accounting period, 5,000Php of the supplies
remain unused.


JOURNAL ENTRY using….


Upon payment on June 2, 2008

........................................EXPENSE METHOD

...........Supplies Expense............................... 20,000
............................Cash .......................................................20,000

.........................................ASSET METHOD
..........Prepaid Supplies................................. 20,000
...........................Cash......................................................... 20,000



Now, the illustrative case states that 5000Php worth of supplies remains unused at the end of accounting period.

Regardless of which method used in recording the prepayment of the purchased supplies worth 20,000Php at the end of the period it is still a “mixed account” or a mixture of both Asset (unused supplies) and Expense (used supplies). For us to bring up the correct balance of those accounts, it’s a must for us to “split up” the 20,000Php worth of supplies into its real account (expense and asset).

And to arrive at that point we must allocate its value to its respective account.

Worth of the Purchased Supplies = 20,000Php
Worth of Unused supplies at the end of accounting period =5,000Php (as stated)

Therefore:

20,000- 5,000 = 15,000 (Used supplies or supplies expense at the end of the accounting

period)

After allocating or splitting up to its respective accounts adjusting entry must be recorded: The adjusting entry for a prepaid expense depends on the entry originally made at the time it was paid

Using the Expense Method:

.............................................................Journal Entry

Jun 2, 2008.........Supplies Expense........................ 20,000
......................................Cash ..........................................................20,000


............................................................Adjusting Entry

Dec. 31, 2008..... Unused or Prepaid Supplies......5,000
......................................Supplies Expense...................................... 5,000

checking:

Supplies Expense = 20,000 (journal entry)

........................................ - 5,000 (adjusting entry)Credited(-)
..........................................=======

..........................................15,000 ending balance

Unused Supplies or Prepaid Supplies

........................................= 0.00 (journal entry)

........................................+5,000 (adjusting entry)Debited (+)

.........................................=====

..........................................5,000 ending balance


Using the Asset Method:
..............................................................Journal Entry

June 2, 2008...... Unused or Prepaid Supplies........ 20,000
.....................................Cash........................................................ 20,000

..............................................................Adjusting Entry

Dec. 31, 2008.... Supplies Expense.......................... 15,000
.....................................Unused Supplies................................... 15,000

Now check it for yourself using the T-Account ^_^

OBSERVE: 1. if an expense account is debited upon payment or upon recording the
.........................Journal entry (Expense Method), the adjusting entry must recognize

..........................the asset account. Therefore credit the expense account ; debit the

..........................asset account.

“ tagalog pa ba?^_^V”

“If ung journal entry nyo daw nung nagbayad kau eh nagrecognize ng expense account so means sa adjusting entry ung asset account nmn dapat mo irecognize so natural ung amount na irerecognize mo eh ung amount din ng asset mo, kung ano ang hindi pa narerecognize sya irerecord mo together with its respective amount”

.................2.if an asset account is debited upon payment or upon recording the Journal Entry (Asset Method), the adjusting entry must recognize the expense account which has not been recorded. Therefore; credit the asset account and debit the expense account.

“^_^V gets mo na sana”