3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
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Alright. So now let's start our discussion of adjusting journal entries. These are a key feature of the accrual accounting system. Let's see how and when we're gonna use them. So the whole idea behind adjusting journal entries is that accounts need to be updated for the passage of time. Some accounts need to be updated for the passage of time. Okay? So there's gonna be some balance in the account and time's gonna pass. And let's say the account balance is gonna be used up. Right? We need to adjust that balance. It's gonna be sitting at that balance until we make these journal entries to bring it to the correct balance. Okay? We're gonna see all types of adjusting entries. And, mostly, they're gonna be deferrals and accruals. We're also going to discuss depreciation, but we go into that way deeper later in the book. Okay? So let's start here with deferrals and accruals. Let's define them. So a deferral, that's an adjustment for the payment of an item or receipt of cash in advance. Okay? So this is when the cash happens before the triggering event happens. Okay? So the cash is happening before the expense or before the revenue. The cash is moving first. Okay? So that Those are gonna be deferrals. Compare that to an accrual which is the opposite of a deferral. This is when we're recording the revenue or expense before collecting cash. Okay? So this is where the revenue or expense happens before the cash moves. Okay? Deferrals, the cash moves, and then the revenue or expense. Accruals, we have the expense or the revenue and then the cash. Okay? So we're gonna kinda see how those go hand in hand. Last but not least, we have depreciation. Okay? So depreciation, this is where we allocate the cost of a long term asset over its useful life. Okay? When I say long term asset, this is like a machine. Right? If we buy a machine to produce our product for that's gonna last us a long time. Say that machine's gonna last us 10 years. Well, we wanna we wanna allocate the cost of the machine over the 10 years. We don't want to just say, Hey. We bought this really expensive machine right now. We just have to take all the expense right now. No. We take the expense little by little over time. Okay. So we'll see how that depreciation works. And just a quick note here, before we dive into our first type of adjusting entry, we're going to be studying these right here. Under deferrals, we've got these. The prepaid expenses, supplies, and unearned revenue. Under accruals, we're gonna learn about accrued expenses and accrued revenue. I've got quotations there. I'll talk about that a little more later. And then last but not least, our depreciation. We're gonna discuss depreciation expense and the associated accumulated depreciation. Alright? So let's take a quick pause here, and then we'll start with prepaid expenses. Our first type of adjusting entry.
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