[Anonymous]

So FAR I have finished both F1 and F2 using Becker Study materials. In section F1 M8 and F2 M7; I struggled with the JE because I was never quite sure what information to use or even sometimes how a change might affect other accounts. Things like accrued expenses, unearned revenue, prepaid expenses don’t just click for me. I know account balances for the most part and then there’s an account I haven’t seen before. I guess something I struggle with is knowing how a change in one account may affect another. I also don’t care for how vague some of the questions seem. Just something that is not so intuitive to me but I know I can work through it with proper studying and your advice!

[Mike J]

Prepaid expenses are assets. Think of what it means to be an asset.

A truck is an asset. When you purchase that, you debit an account for a truck. You must decrease an asset (if you pay cash) to purchase it. Thus Dr Truck; Cr Cash.

You buy the truck so you can have use of it. Over time, you depreciate it as you use it.

Prepaids work the same way. You purchase an asset for (eg insurance) for the year. As time goes by, you use it up little by little.

So just think logically​ about what you're doing. Then apply journal entries.

Hope that helps

[Wannafree]

Try this
for IS and BS ,Period is important.You prepare the IS for a period ( say year 1 , Jan to Dec and BS on 31st Dec).
your expense ( not necessarily payment ) and revenue ( not necessarily cash receipt ) should belong to the period Year 1 ( Jan to Dec).
So let us say you have received the advance for supplying items next year ( year 2 ),would you consider it revenue or income in year 1? NO ,because you will supply next year.Its not revenue this year ,so you can say unearned revenue.Where should unearned revenue be shown ? IS is for Income/revenue and Exp for the period so unearned revenue should be shown outside the IS .Hence unearned revenue should be shown in the BS as liabilities .Why ? Because you are liable ( next year ) to supply the items for advances you received.
Again Scholar , apply same logic for amount you have paid for next year , you can't show as expense this year. You can't call it expense for this year but you have already paid ,so you can say pre-paid expense.Again ,where should pre-paid be shown ? outside the IS.
I hope it will help.

[Mike J]

Timing is everything. It's true in life and it's true for FAR.

Subscription revenue can be tricky but like anything else can be explained logically.

Sports Illustrated receives cash for magazine subscriptions that they have yet to provide. SI would debit cash and credit an unearned income account. Did they earn the money received? No. Because they did not yet mail a magazine yet. This works as a liability account because if SI is unable to send a magazine per the agreement they won't earn the money and will have to pay the cash back.

Once they mail the first issue, they Debit Unearned Income total for 1 month. Credit Revenue. Revenue is a credit balance.

Like I said, timing is important. Let's return to the prepaid expense example.

You pay for rent for the year in advance. It's an asset because the company has the prepaid rent to use for it's benefit.

Remember too that assets are listed in order of liquidity on the balance sheet. Typically, rent is paid on a monthly basis. So debit Rent Expense, Credit Prepaid Rent for the monthly amount of the total you paid in advance for a 12-month period.

I juxtaposed buying a truck with prepaid rent because they are dealt with similarly. An asset is intended to be used by the company for business-related purposes. Just like PP&E, throughout the current period you decrease the total asset amount by the amount of usage.

There are some differences of course but the mechanics (journal entries) are very similar. Prepaids are current assets because the company is expected to use up the entire benefit within a year. Conversely, the entire benefit is expected to be expired in more than one year. Generally we know for a certainty the amount to reduce the Prepaid asset. Depreciation–the mechanical equivalent of booking the monthly rent expense–is based on an estimate (eg STL vs DDB and is there a salvage value).

For each type of asset I mentioned you also “expense” the amount of the asset's benefit to the company that the company used.

As someone mentioned, that's a critical difference between an Income Statement and a Balance Sheet. An Income Statement is showing the outside what activities took place in a given period. Here, which assets did you use up? A balance sheet would be used to show, among other things, how much of said assets a company has available to use.

…

So like I said, instead of merely memorizing formulas and journal entries for the sake of it, think about what you're asked to do.

The questions get tricky because you have to keep in mind how many months have gone by. The testmakers LOVE to test you on that. T-accounts can help keep everything straight.

You'll get it.

[Author]

Replies