Cases For Critical Thinking in Accounting?

Question

Gretel Bakken forgot to journalize and post the adjusting entry for prepaid insurance at the end of the June fiscal period. What effect will this omission have on the records of Ms. Bakken's business as of June 30? Explain your answer. Question #1

Vicente Burgos states that his business is so small that he just records supplies and insurance as expenses when he pays for them. Thus, at the end of a fiscal period, Mr. Burgos does not record adjusting and closing entries for his business. Do you agree with his accounting procedures? Explain your answer.

Additional Details

the second part is question #2

Answer 1

Best Answer - Chosen by Voters

Gretel Bakken forgot to journalize and post the adjusting entry for prepaid insurance at the end of the June fiscal period. What effect will this omission have on the records of Ms. Bakken's business as of June 30? Explain your answer. Question #1

The adjusting entry should have been:
Dr Insurance Expense
Cr Prepaid Insurance
Without the adjustment expenses will be understated, which will overstate Equity. Assets will be overstated.

Vicente Burgos states that his business is so small that he just records supplies and insurance as expenses when he pays for them. Thus, at the end of a fiscal period, Mr. Burgos does not record adjusting and closing entries for his business. Do you agree with his accounting procedures? Explain your answer

According to the matching principle, expenses should be matched to the revenues in the period in which they were produced. By expensing these items at the time of purchase, the owner is not abiding by this principle.