[raven]

Hi Would someone please explain this to me? Possibly with journal entries or T accounts. I don’t understand it. Thanks 🙂

Question:

Ina Co. had the following beginning and ending balances in its prepaid expense and accrued liabilities accounts for the current year:

Prepaid Expenses Accrued Liabilities

---

---

Beginning balance $ 5,000 $ 8,000

Ending balance 10,000 20,000

Debits to operating expenses totaled $100,000. What amount did Ina pay for operating expenses during the current year?

Answer:

The entry to accomplish all of these changes at one time would include an increase to prepaid expenses with a $5,000 debit, and a $100,000 debit to operating expenses. One of the credits would be needed to increase the accrued liabilities by $12,000 and the other remaining credit to finish the entry would be to cash for $5,000 + $100,000 – $12,000, or $93,000.

A- pass
F- pass
R- pass
B - August 2014 - pass - YAY!!!!

[Anonymous]

The starting point for this question is Operating Expenses $100,000. For these questions, you always need to get that starting point so you know what to build on/take away from.

Prepaid expenses increased by $5,000. What does this mean? We debit prepaid expenses $5,000, and credit cash $5,000. How does this affect operating expenses? Well, this journal entry was not recognized in operating expenses because it isn't an expense yet. However, it DOES affect cash, because we DID pay cash, to the insurance company for prepaid insurance or whatever. Therefore, we spent $5,000 more cash than our operating expenses claim we did. Add $5,000 to operating expenses.

Accrued liabilities increased by $12,000 during the year. What does this mean? We debited an expense for $12,000 and we credited accrued liabilities for $12,000. How does this affect operating expenses? Well, this journal entry was recognized in operating expenses. However, it DID NOT affect cash, because we DID NOT pay cash for it yet. We've simply incurred an expense over the period that we're going to get around to, just not right now. So we have $12,000 in operating expenses that did not require cash. Therefore, we spent $12,000 less than our operating expense claims we did. Subtract $12,000.

$100,000

+ 5,000

– 12,000

= $93,000

Here's some T-accounts and journal entries: https://i.imgur.com/1XdsnhW.jpg

There are a lot of cash flow “formulas” out there that say “if so and so increases that means cash decreases and if such and such decreases cash also decreases” and honestly I find those formulas to be more trouble than they're worth. Especially when you consider you could easily be given a problem where the starting point is cash and you have to reverse to expenses, and then you have to flip the formula in your head, and then you get mixed up in 10 different ways. Just think through the problem. Cash flows is a very strange way of thinking, but eventually it comes together and isn't the worst thing in the world.

[Anonymous]

The starting point for this question is Operating Expenses $100,000. For these questions, you always need to get that starting point so you know what to build on/take away from.

Prepaid expenses increased by $5,000. What does this mean? We debit prepaid expenses $5,000, and credit cash $5,000. How does this affect operating expenses? Well, this journal entry was not recognized in operating expenses because it isn't an expense yet. However, it DOES affect cash, because we DID pay cash, to the insurance company for prepaid insurance or whatever. Therefore, we spent $5,000 more cash than our operating expenses claim we did. Add $5,000 to operating expenses.

Accrued liabilities increased by $12,000 during the year. What does this mean? We debited an expense for $12,000 and we credited accrued liabilities for $12,000. How does this affect operating expenses? Well, this journal entry was recognized in operating expenses. However, it DID NOT affect cash, because we DID NOT pay cash for it yet. We've simply incurred an expense over the period that we're going to get around to, just not right now. So we have $12,000 in operating expenses that did not require cash. Therefore, we spent $12,000 less than our operating expense claims we did. Subtract $12,000.

$100,000

+ 5,000

– 12,000

= $93,000

Here's some T-accounts and journal entries: https://i.imgur.com/1XdsnhW.jpg

There are a lot of cash flow “formulas” out there that say “if so and so increases that means cash decreases and if such and such decreases cash also decreases” and honestly I find those formulas to be more trouble than they're worth. Especially when you consider you could easily be given a problem where the starting point is cash and you have to reverse to expenses, and then you have to flip the formula in your head, and then you get mixed up in 10 different ways. Just think through the problem. Cash flows is a very strange way of thinking, but eventually it comes together and isn't the worst thing in the world.

[nicole2035]

I always loved T accounts because i do find them helpful.

Anytime faced with problems like that, they're basically asking you to fill in the missing journal entry. So whenever they're talking about an account in a problem, you need also a t-account for the other side of the entry

If expenses are mentioned you will need also a t-account for liabilities. Prepaid expenses would go with cash. Operating Expense would go with liabilities, and so on.

@dragnets gave a great explanation. i think some people groan over t-accounts bc they're not very fun looking

[nicole2035]

I always loved T accounts because i do find them helpful.

Anytime faced with problems like that, they're basically asking you to fill in the missing journal entry. So whenever they're talking about an account in a problem, you need also a t-account for the other side of the entry

If expenses are mentioned you will need also a t-account for liabilities. Prepaid expenses would go with cash. Operating Expense would go with liabilities, and so on.

@dragnets gave a great explanation. i think some people groan over t-accounts bc they're not very fun looking

[raven]

thank you so much – i really appreciate it. I followed your response/ t accounts and was able to work through the problem. Hopefully I will remember how to do this on Tuesday. 🙂

A- pass
F- pass
R- pass
B - August 2014 - pass - YAY!!!!

[raven]

thank you so much – i really appreciate it. I followed your response/ t accounts and was able to work through the problem. Hopefully I will remember how to do this on Tuesday. 🙂

A- pass
F- pass
R- pass
B - August 2014 - pass - YAY!!!!

[Author]

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