Respuesta :
Prepayments can be recorded using the asset and expense method. Using the asset method, prepaid expenses are initially recorded as prepayments and were proportionately recorded as expense when it is incurred. On the other hand, whent using the expense method, the prepaid expense is initially recorded as expense and adjusted at the end of the year. In adjusting, the unused portion of the prepaid expense is reverted as part of the asset and account and deducted from the recognized expense. In effect, this expense portion affects the retained earnings account. This retained earnings account is an equity account.
The equity change of this transaction can be analyzed in these two (2) scenarios:
1. Using the asset method, the insurance policy is initially recorded as
Prepaid Insurance 4,800
Cash 4,800
To record the payment of prepaid insurance._________
Insurance Expense 400
Prepaid Insurance 400
To record the expired position of the insurance__________
In effect, the expense account is increased by 400. Therefore, the equity account, particularly the retained earnings, is decreased by 400.
2. Using the expense method, the insurance policy is initially recorded as
Insurance Expense 4,800
Cash 4,800
To record the payment of prepaid insurance.___________
Prepaid Insurance 4,400
Insurance Expense 4,400
To record the expired position of the insurance___________
In effect, the the equity account, particularly the retained earnings, is decreased by 4,400.
In the accounting books, only 400 should be reported as insurance expense as of January 31, 2019.
Learn more about equity here; https://brainly.com/question/13278063?referrer=searchResults
#SPJ4
