[Anonymous]

dr. inventory

cr. prepaid expense

dr. prepaid expense

cr. cash

net effect

dr. inventory

cr. cash.

Can someone explain the 3 transactions to me?

[Anonymous]

You haven't provided very much information. It looks like the dr. to prepaid expense is cancelled out by the cr. to prepaid expense leaving a net effect (in terms of overall FS effect) of a dr. to inventory and a cr. to cash.

It would be more helpful if you provided the context of the question you are referring to?…

[mla1169]

So you pay for inventory before it arrives. That credits cash and the offset is a prepaid asset on the B/S.

Once the inventory arrives, you debit inventory and credit the prepaid asset to relieve it.

The debit and credit to prepaid cancel each other out so the net effect is that you increased inventory and decreased cash.

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[s2sylvir]

To be honest those entries make no sense to me whatsoever.

Even with the above explanation, prepaids are usually debits/assets aren't they?

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[mla1169]

Prepaids are on the balance sheet, not the income statement. It can be called a prepaid “expenses” but it still doesn't go to the income statement. Some balance sheets have multiple prepaid accounts so to be descriptive they could be called prepaid insurance (expense) or prepaid supplies (expense) although usually the word expense is left off. The normal balance is a debit balance but naturally credits will be entered to the account just like cash gets credited to decrease it.

FAR- 77
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Massachusetts CPA (non reporting) since 3/12.

[Anonymous]

One of our employee submitted an expense report. he bought an ingredient for $300.

the thing is.. I have to dr inventory and credit prepaid expense before he buys the ingredient.

when he buys it.. using his own money, I have to credit cash and debit prepaid expense.

Just kinda confused as to why it's being done this way.. Dunno if this is standard practice or if it is just our company. Kind of weird to credit a prepaid asset account, don't you think?

[Anonymous]

Sorry for not providing the backstory beforehand!

[s2sylvir]

@berrygoose

I would have credited it to “Due to Employee/Shareholder”

If it's a partner, I would have credited it to “Partner Contribution/Draws”

-Edit-

By the employee personally purchasing the items, the company has created a liability to pay the employee. It doesn't make sense to decrease an asset account. The books should increase a liability account.

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AUD - PASS (63, 71, 74, 74, 83)
REG - PASS (88)
FAR - PASS (58, 89)

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[mla1169]

No you shouldn't debit inventory until the inventory has been purchased. Don't touch the inventory account beforehand, anybody who tells you otherwise is flat out wrong. You want at all times the balance in the inventory account to match your physical inventory. If it hasn't been purchased yet, it's got no business in the G/L.

When you give the employee the money you debit employee advances and credit cash. When he turns in the receipt you debit inventory and credit EE advances.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[s2sylvir]

^That makes sense

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AUD - PASS (63, 71, 74, 74, 83)
REG - PASS (88)
FAR - PASS (58, 89)

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[Anonymous]

Thanks! Makes sense now.

[Author]

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