Materiality – will it matter; magnitude

Prepaid Expense – an asset

Dr. Cr.
Assets = Liabilities + Equity
 Revenue
 Expenses – contra-equity (debit)
No entry:
Signed contract
Ordered equipment
With entry:
Received water bill/utilities
ADJUSTING ENTRIES
 Asset Method
Transaction: January 1 – 3-year prepaid advance – P36,000
Journal Entry: Prepaid Insurance 36,000
Cash 36,000

CLOSING ENTRIES
1. Close the income accounts.
2. Close expenses.
3. Close the Income Summary to Capital
4. Close withdrawals to Capital

Closing income accounts

Gain-debit
Loss-credit
Service Revenue 50,000
Income Summary 50,000
Closing the expenses
Income Summary 33,400
Salaries Expense 11,000
Advertising Expense 7,000
Office Supplies Expense 3,400
Rent Expense 10,000
Depreciation Expense 2,000
Closing Income Summary to Capital
Income Summary 16,600
PB Capital 16,600
Closing Withdrawal to Capital
PB Capital 2,000
PB Withdrawal 2,000