Two questions if anyone could help would be appreciated =]
1) $200 interest expense was incorrectly recorded as interest revenue. Record the necessary correcting entry.
My guess was;
Int Rev 200 debit
Int Exp 200 debit
P+L Sum 400 credit
Is that right? If not, how do you do it when they are both on the same side?
2) Just in general, how do you do prepayments and accrued expenses in the cash flow statement (operating activities)
Say Insurance paid 12 months in advance $1800 1 October, cash flow statement for end of December
So how do you record this fully in the operating activities? I know that the insurance expense for that period is 450, but what do I do with the rest of the prepayment since it is technically an outflow
And also same thing, what about accrued expenses?
1) You also have to adjust bank. interest expense is an outflow so you have to debit bank to ensure the erroneous credit is eliminated. and then when you add interest revenue you debit to bank to record the inflow of interest which is cash. P/L summary is a tool you use at the end of the reporting period to calculated net profit/loss. [this is unless you were advised by the question to make the adjustment at the end of the reporting period after the P/L summary was completed - if that was the case you are correct]
2) In the cash flow statement you record it 'prepaid [asset] expense paid' as an outflow for the full amount you paid. for the income statement you record only the amount of the expense consumed in the reporting period.
The
cash flow statement records all flows of cash, whereas income statement only includes
expenses incurred (not necessarily paid), and
revenues earned (not necessarily received).
Accrued expenses in the cash flow statement isn't included as by definition it is an expense you have incurred, but no outflow of cash has occurred.
The distinction between cash flows and profit earned/expenses incurred is very important [has its own dot point in the key knowledge] so make sure you learn it well for the exam.