1. LO 2a – Recording Adjusting Entries for Prepaid Expenses
The Adjusting Process
LO 2a – Recording Adjusting Entries for Prepaid Expenses

2. Unadjusted Trial Balance
LO 2
Adjusting Entries
Unadjusted Trial Balance for NetSolutions
NetSolutions
Unadjusted Trial Balance
December 31, 2011
This shows the unadjusted trial balance for NetSolutions before any adjusting entries have been prepared.

3. LO 2
Prepaid Expenses
NetSolutions’ supplies account has a balance of $2,000 on the unadjusted trial balance. Some of these supplies have been used. On December 31, a count reveals that the amount of supplies on hand is $760.
Supplies (balance on trial balance) $2,000
Supplies on hand, December – 760
Supplies used $1,240
NetSolutions’ Supplies account has a balance of $2,000 in the unadjusted trial balance, in the previous slide. Some of these supplies have been used during the month. On December 31, account reveals that $760 of supplies are on hand. Most businesses do not update the balance of the supplies account as supplies are used. Instead, they wait until the end of an accounting period, and then they count the amount of remaining supplies.

4. Accounting Equation Impact
LO 2
Prepaid Expenses
Assets = Liabilities Owner’s Equity (Expense)
Accounting Equation Impact
The balance of $2,000 in Supplies and $800 in Supplies Expense are the balances before adjustments are made for the current period’s usage of supplies. Debit Supplies Expense for $1,240, and credit Supplies for $1,240 to adjust for the consumed supplies. This will reduce the asset account, Supplies, to $760, the amount of supplies that are left at the end of December. The adjusted balance for supplies is $760 ($2,000 minus $1,240). The adjusted balance for Supplies expense is $2,040 ($800 plus $1,240).
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5. LO 2
Prepaid Insurance
The debit balance of $2,400 in NetSolutions’ prepaid insurance account represents the December 1 prepayment of insurance for 12 months.
The debit balance of $2,400 in NetSolutions’ Prepaid Insurance account represents the December 1 prepayment of insurance for 12 months.

6. Accounting Equation Impact
LO 2
Prepaid Insurance
Assets = Liabilities Owner’s Equity (Expense)
Accounting Equation Impact
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Examining the ledger accounts, Prepaid Insurance has a balance of $2,400, and Insurance Expense has a balance of zero. If $2,400 was paid for a 12-month policy, NetSolutions used up 1/12 of the total of $2,400, or $200 per month. This expiration of insurance requires that an adjusting entry be made, debiting Insurance Expense for $200 and crediting Prepaid Insurance for $200. The new balance of Prepaid Insurance is $2,200 ($2,400 minus $200). The new balance of Insurance Expense is $200, since the beginning balance was $0.
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