Prepaid & Accrued Expenses Ch.13 Acc 3/4

prepaid expense

a current asset that has been paid in advance in the current Period but is yet to be incurred

Why are prepaid expenses classified as assets?

They provide a future economic benefit, so owner's equity has not yet decreased.

How is a prepaid expense recorded when it is paid?

Dr Prepaid Expense
Dr GST Clearing (if applicable)
Cr Bank

Why is a Balance Day Adjustment (BDA) required for prepaid expenses?

To recognise only the amount incurred in the current reporting period.

What is the BDA journal entry for a prepaid expense?

Dr Expense
Cr Prepaid Expense

What is the effect of a prepaid expense BDA on the Accounting Equation?

• Assets ↓

• Liabilities: No effect

• Owner's Equity ↓ (expense increases)

What happens if a prepaid expense is not adjusted?

Assets, Net Profit and Owner's Equity are overstated, while expenses are understated.

accrued expense

a current liability that arises when an expense has been incurred in the current Period but has not yet been paid

Why is a BDA required for accrued expenses?

To recognise expenses incurred in the current period, even though payment hasn't been made.

What is the BDA journal entry for an accrued expense?

Dr Expense
Cr Accrued Expense

What is the effect of an accrued expense BDA on the Accounting Equation?

• Assets: No effect

• Liabilities ↑

• Owner's Equity ↓

How is an accrued expense recorded when it is paid in the next period?

Split the payment between:

• Accrued Expense (repays last period's liability)

• Current Expense

• GST Clearing (if applicable)

• Bank

What is the difference between an accrued expense and Accounts Payable?

• Accrued Expense: Expense incurred, no invoice received.

• Accounts Payable: Credit purchase, invoice received.

pre-adjustment trial balance

a list of all General Ledger accounts and their balances before balance day adjustments have been made

Post-adjustment Trial Balance

a list of all General Ledger accounts and their balances after balance day adjustments have been made

Why is a Post-adjustment Trial Balance prepared?

To check that total debits still equal total credits and ensure adjusted balances are used in the financial reports.