I am confusing myself. I knew one method to record prepayment but yesterday at uni they confused me. So.. 1st method - 1)June we purchase 3 month insurance 1500 pounds. Then we have to.. DEBIT Prepaid Insurance and CREDIT for Cash/Bank and later that at the end of each month we make an adjustment such as 31June) DEBIT Insurance Expense and CREDIT Prepaid Insurance.
2nd method is is recording prepayment directly in the expense account ( this is what confuses me when making the T-accounts). So 1June) DEBIT Insurance EXPENSE and CREDIT Cash/Bank and at the end of the month we DEBIT Prepayment 1000 and CREDIT Ins. Expense with 1000.
The second method is a shortcut but I have to understand it and If anybody can continue and make all the entries up to Aug 31.
It should be something like that.
1 June DR Insurance Expense 1500
CR Cash/Bank 1500
30 June DR Prepayment 1000
CR Insurance Expense 1000
1 July DR Insurance Expense 500
CR Prepayment 500
...and so on..
1 Aug DR Insurance Expense 500
CR Prepayment 500
31 Aug .. What should I have here ? It is quite strange because we have to get rid of the prepayment account so do i put 0. How do i record the last transaction by this method ? We decrease the expense account and the prepaid account automatically somehow and at the end there is nothing left in both accounts Prepayment and expense. This totally throws me in confusion and I wonder why we use this method.
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Thank you very much in advance!
2nd method is is recording prepayment directly in the expense account ( this is what confuses me when making the T-accounts). So 1June) DEBIT Insurance EXPENSE and CREDIT Cash/Bank and at the end of the month we DEBIT Prepayment 1000 and CREDIT Ins. Expense with 1000.
The second method is a shortcut but I have to understand it and If anybody can continue and make all the entries up to Aug 31.
It should be something like that.
1 June DR Insurance Expense 1500
CR Cash/Bank 1500
30 June DR Prepayment 1000
CR Insurance Expense 1000
1 July DR Insurance Expense 500
CR Prepayment 500
...and so on..
1 Aug DR Insurance Expense 500
CR Prepayment 500
31 Aug .. What should I have here ? It is quite strange because we have to get rid of the prepayment account so do i put 0. How do i record the last transaction by this method ? We decrease the expense account and the prepaid account automatically somehow and at the end there is nothing left in both accounts Prepayment and expense. This totally throws me in confusion and I wonder why we use this method.
Reply With Quote
Thank you very much in advance!
