Adjusting Entries for Prepaid Expenses (Financial Accounting Tutorial #20) PRESENTER: So in the last presentation, I kind of gave you an idea of how to actually create adjusted entries for accrued expenses. And I went behind the theory and gave you an example of how to actually conduct and adjust in entries. So if you actually don't know the theory behind adjusting entries and you want me to explain it to you, make sure you check out that first tutorial, because this is just going to be a continuation, where I'm going to show you an example, actually how to perform an adjusting entry for prepaid expenses. So we're just going to talk about one example. And I'm going to start doing that right now. So prepaid expenses, like I said, they're kind of like the opposite of accrued expenses. Accrued expenses are expenses that you have not paid for yet, while prepaid expenses are expenses that you have paid for upfront. So one example could be that they're paying one year of rent for our, maybe we could say, an office that we're renting. So let's say that we paid initially $3,600 for one year of rent and that our rent contract begins on the 1st of August and that we are actually at the end of August, because adjusting entries are done at the end of the month to show the passing of time, like I've put up here next to the rule involving adjusting entries. And we need to show an adjusting entry to report the expense of our rent, because expenses are kind of synonymous with use. So we need to show that we used one month of rent. So on the 1st of August, we would actually record a journal entry to recognize paying for the rent, something like this. It would look like prepaid expense, which is an asset. And we would have a credit entry, which would be cash, because we're paying for it up front. And if it's $3,600, then we're paying for it entirely up front. Now one month goes by. So if we think about a timeline, we have one year. so we've got 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12. And we're at this point right now. One month has elapsed. So we need to record that we've used one month of this rent contract. So what we're going to do is we're going to take the $3,600 divided by 12 months, because obviously this is for an entire year. And August was the first month of our lease, I guess you could say. And that would be $300 a month. And the way we're actually going to record an expense entry or our adjusting entry to show that we've used up a month is we're going to have an expense entry because like I said in the rules, we're either going to have a revenue or an expense adjusting entry. And this is not a revenue entry, because we're not earning any money. We're actually using up rent. So whenever we use something, we expense it. So we're going to put down rent expense as our debit. , Expenses are always debits when you're increasing your expenses. And we're going to reduce our asset, which is prepaid rent, because we need to show that our asset is now $300 less and that one month of the asset has been used up. And we are going to put $300 on the debit and credit side to show that we have expensed one month. So this shows that we have expensed one month. And yeah, that's exactly the point of the adjusting entry. The adjust entry, if you look back at the rules, they're all in line with the rules. We have created an expense adjusting entry. It doesn't involve cash. And the adjusting entry is used to show the passage of time, or the passage of one month. So there we go. We've just created a prepaid expense adjusting entry. Hopefully you guys understand prepaid expenses. I'll be talking about the revenue adjusting entries in the next one. Thanks for watching. See you guys. If you have any questions regarding accounting or any of the material within our videos, you can tweet @NotePirate, you can like us on Facebook to receive updates or to share any quick anecdotes about how our videos might have helped. And like always, thanks for watching us on YouTube.