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  • Prepaid Expense and Unearned Revenue

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    Prepaid expense refers to expenses paid in advance that will be recognized over future periods. There are two methods for recording prepaid expenses over time: the asset method decreases the prepaid expense account and increases the expense account, while the expense method decreases the expense account and increases the prepaid expense account. Similarly, unearned revenue refers to cash received in advance of services rendered; the liability method decreases unearned revenue and increases revenue, while the revenue method decreases revenue and increases unearned revenue.

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    Prepaid expense refers to expenses paid in advance that will be recognized over future periods. There are two methods for recording prepaid expenses over time: the asset method decreases the prepaid expense account and increases the expense account, while the expense method decreases the expense account and increases the prepaid expense account. Similarly, unearned revenue refers to cash received in advance of services rendered; the liability method decreases unearned revenue and increases revenue, while the revenue method decreases revenue and increases unearned revenue.

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    13 views2 pages

    Prepaid Expense and Unearned Revenue

    Uploaded by

    Accounting Stuff
    Prepaid expense refers to expenses paid in advance that will be recognized over future periods. There are two methods for recording prepaid expenses over time: the asset method decreases the prepaid expense account and increases the expense account, while the expense method decreases the expense account and increases the prepaid expense account. Similarly, unearned revenue refers to cash received in advance of services rendered; the liability method decreases unearned revenue and increases revenue, while the revenue method decreases revenue and increases unearned revenue.

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    Download as PDF, TXT or read online from Scribd
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    Prepaid Expense

    ● Prepaid Expense is a type of asset account that refers to a prepayment or


    advance payment of expenses to be incurred in future certain periods.
    ● Prepaid Expenses could be recorded or journalized and adjusted using the
    following methods:
    ○ Asset Method
    ○ Expense Method

    Asset Method Expense Method

    Journalizing Prepaid Expense xx Expense xx


    Cash xx Cash xx

    Adjusting Expense xx Prepaid Expense xx


    Prepaid Expense xx Expense xx
    Note: The amount of Prepaid Expense Note: The amount of Prepaid Expense
    used at the end of the period will be left at the end of the period will be used.
    used.

    Example:

    Asset Method Expense Method

    Journalizing Prepaid Expense 2,400 Expense 2,400


    Journalizing: Paid 2,400 cash Cash 2,400 Cash 2,400
    for future advertising

    Adjusting Expense 1,000 Prepaid Expense 1,400


    Adjusting: An amount of 1,400 Prepaid Expense 1,000 Expense 1,400
    from the advertising paid on Note: The amount of Prepaid Expense Note: The amount of Prepaid Expense
    November 1 is still unused which has expired at the end of the left unused at the end of the period will
    period will be used. be used.
    Unearned Revenue

    ● Unearned Revenue is a type of liability account that refers to the advance cash
    payment made by the customer for the services to be rendered in a certain
    period.
    ● Unearned Revenue could be recorded or journalized and adjusted using the
    following methods:
    ○ Liability Method
    ○ Revenue Method

    Liability Method Revenue Method

    Journalizing Cash xx Cash xx


    Unearned Revenue xx Revenue xx

    Adjusting Unearned Revenue xx Revenue xx


    Revenue xx Unearned Revenue xx
    Note: The amount of Unearned Note: The amount of Unearned
    Revenue finally earned at the end of the Revenue not yet rendered at the end of
    period will be used. the period will be used.

    Example:

    Liability Method Revenue Method

    Journalizing Cash 2,600 Cash 2,600


    Journalizing: Received 2,600 Unearned Revenue 2,600 Service Revenue 2,600
    cash for future services to be
    provided to a customer

    Adjusting Unearned Revenue 1,400 Service Revenue 1,200


    Adjusting: Services worth Service Revenue 1,400 Unearned Revenue 1,200
    1,200 are not yet provided to Note: The amount of Unearned
    Note: The amount of Unearned
    the customer who paid on Revenue not yet rendered at the end of
    November 30 Revenue finally earned at the end of the
    period will be used. the period will be used.

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