Page 121 - Accounting Principles (A Business Perspective)

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An accounting perspective:

Uses of technology

It is difficult to name a publicly owned company that does not provide an extensive website. In fact,
websites have become an important link between companies and their investors. Most websites
will have a link titled investor relations or merely company information which provides a wealth of
financial information ranging from audited financial statements to charts of the company's stock
prices. As an example, check out the Gap, Incs website at:
http://www.gapinc.com
Browse the Gap site and see for yourself the comprehensiveness of the financial information

available there.

Adjustments for deferred items
This section discusses the two types of adjustments for deferred items: asset/expense adjustments and

liability/revenue adjustments. In the asset/expense group, you learn how to prepare adjusting entries for prepaid
expenses and depreciation. In the liability/revenue group, you learn how to prepare adjusting entries for unearned
revenues.
MicroTrain Company must make several asset/expense adjustments for prepaid expenses. A prepaid expense
is an asset awaiting assignment to expense, such as prepaid insurance, prepaid rent, and supplies on hand. Note
that the nature of these three adjustments is the same.
Prepaid insurance When a company pays an insurance policy premium in advance, the purchase creates the
asset, prepaid insurance. This advance payment is an asset because the company will receive insurance coverage in
the future. With the passage of time, however, the asset gradually expires. The portion that has expired becomes an

expense. To illustrate this point, recall that in Chapter 2, MicroTrain Company purchased for cash an insurance
policy on its trucks for the period 2010 December 1, to 2011 November 30. The journal entry made on 2010
December 1, to record the purchase of the policy was:
2010
Dec. 1 Prepaid Insurance 2,400
Cash 2400
Purchased truck insurance to cover a one-year period.

The two accounts relating to insurance are Prepaid Insurance (an asset) and Insurance Expense (an expense).
After posting this entry, the Prepaid Insurance account has a USD 2,400 debit balance on 2010 December 1. The
Insurance Expense account has a zero balance on 2010 December 1, because no time has elapsed to use any of the
policy’s benefits.
(Dr.) Prepaid Insurance (Cr) (Dr.) Insurance Expense (Cr)
2010 2010
Dec. 1 Dec. 1
Bal. 2,400 Bal. -0-

Accounting Principles: A Business Perspective 122 A Global Text