If you are like many of our 30,000 members, you need to make the adjustments to expense and prepaid-expense accounts at year-end. The tip below is just one example of the timely, useful help we give members in their monthly technical update, The General Ledger (www.aipb.org/general_ledger.html).
 
Year-end adjustment if prepayment was recorded in a prepaid account. You work for a calendar-year company. On October 1, 2007, you prepay a 1-year insurance premium of $24,000 for insurance effective the same date and record it in Prepaid Insurance. a. What entry do you record on October 1? b. What entry do you record at year-end?
  
a. You record the following transaction entry on October 1, 2007:
  

Prepaid Insurance
 24,000
 
     Cash
  
 24,000
To record prepayment of 1-year premium  

 
b. You record the following adjusting journal entry on Dec. 31, 2007:
 

Insurance Expense
 6,000*
 
  
     Prepaid Insurance
  
 6,000
 
To record insurance Oct.–Dec. expense ($24,000 x 3/12)

 
* $24,000/12 months = $2,000 per month x 3 months of insurance used up (October, November and December) = $6,000 total insurance expense used up by year-end.
 
This adjusting entry debits Insurance Expense, increasing the balance by $6,000 to recognize the amount of insurance used up in 2007–and credits Prepaid Insurance to reduce the account by the same amount, leaving a balance of $18,000 ($24,000 – $6,000).
 
Year-end adjustment if prepayment was recorded in an expense account. You work for a calendar year company. On October 1, 2007, you prepay a 1-year insurance premium of $24,000 for insurance effective the same date and record it in Insurance Expense. a. What entry do you record on October 1? b. What entry do you record at year-end?
  
a. You record the following transaction entry on October 1, 2007:
  

Insurance Expense
 24,000
 
     Cash
  
 24,000
To record prepayment of 1-year premium  

 
b. You record the following adjusting journal entry on December 31, 2007:

 

Prepaid Insurance
 18,000
 
      Insurance Expense
  
 18,000
To adjust insurance expense

 
* $24,000/12 months = $2,000 a month x 3 months of insurance actually used up (October, November and December) = $6,000 insurance expense used up by year-end.
 
The credit to Insurance Expense reduces the balance in the account to $6,000, the amount of insurance used up in 2007 ($24,000 balance – $18,000 deferred for use in 2008). The debit to Prepaid Insurance–you may have to set up the account when you make the adjusting entry–leaves a balance there of $18,000.