 Hello and welcome to the session. This is Professor Farhat and this session would look at the furlough expenses or prepaid adjustments, which are one type of adjusting entries A topic that give accounting students some issues. This topic is covered in an introductory course Obviously the CPA exam. As always, please connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lectures. This is a list of all my courses. If you like my lectures, please like them, share them, put them in playlists. If they benefit you, it means they might benefit other people, share the wealth. Also connect with me on Instagram. If you need additional resources such as PowerPoint slides, true, false, multiple choice, CPA, if you're studying for your CPA, I do have on my website 2,000 plus CPA questions. I strongly suggest you check it out. So framework for adjustments. In the prior session, we looked at introduction to adjustments and we determined there are 4 types of adjustments. The furlough expenses, the furlough of revenue, accrued expenses and accrual revenue. In this session, we're going to focus on the furlough expenses except depreciation, which I'll have, I like to have a one session for depreciation because sometimes when you blend it with all the other prepaid, it confuses students, so I'm going to keep it separately. Let's go back and see how we prepare adjustments. So how do we prepare adjustments? The first thing is, do we know what the current account balance is? What is the current account balance that we are adjusting? Then step two, what the account balance should be? So if the current balance is 100 and it should be 100, no adjustment. If the current balance is 100 and it should be 80, reduce it by 20. If the current balance is 100 and it should be 120, increase it by 20. So what is it now and what it's supposed to be? Then take the difference between one and two and that's your adjusting entry. Okay, so let's take a look at specifically at prepaid. So this way we can illustrate the concepts. Now I'm going to be working with this trial balance. Now you can look at this trial balance as giving, but if you want to know really how this trial balance came to life, I have this from scratch. You can click on the description below to find out exactly how we build this whole trial balance. Because now it's given to you, you can work with it. But you know what? I want to know where this amount coming from. I want to know where this amount coming from. I want to know where this amount coming from. Please look in the description. I build this trial balance step by step, but for now we can work with it. So the first type of adjustments we're going to be working with are prepaid or the furrows. So what are prepaid or the furrows? Prepaid expenses are assets paid in advance of receiving door benefits. Let's go back to the trial balance and we already determined that supplies is a form of prepaid in prepaid insurance is prepaid. So those are the two accounts that we need to adjust. Examples are prepaid insurance, prepaid rent, supplies, anything that we prepay. Any prepay expense is a prepaid. Supplies also are form of prepaid. Now what's going to happen to the prepaid? I want you to think of it from a logical perspective. Let's go back to supplies. What's going to happen to our supplies account? If we have 97.20, our supplies account eventually will go down. Why? Because we use the prepaid insurance. As time goes by, it should go down. So at the end of the accounting period, we have to determine if these numbers are still correct. If they are still correct, then we don't have to worry about anything. Otherwise, we have to make the following adjustment. We have to reduce the asset. We have to decrease the asset and we have to turn it into an expense. Simply put, we're going to debit an expense and credit an asset to adjust the prepaid. We're going to reduce the asset because that's what happened to assets. They go down. Assets go down and expenses go up. Asset goes down, expenses go up. Let's take a look at this example. Fast forward paid 2400 to cover 24 month insurance policy beginning December 31st and this is properly reflected in the trial balance. So this is the current balance as of December 1st and on December 31st, it still showed 2400 unless we do something about it. Now, what happened now a month later? Well, remember, this policy covered 24 months. So what does that mean? It means if it covers 24 months, it means if we take 2400 divided by 24 months, it's going to give us 100. Simply put, $100 of this policy, it's going to expire. It's going to go down and it's going to increase insurance expense. So every month that goes by, this policy goes down by 100. So show that to me in a journal entry. Well, I'm going to reduce the asset, reduce the asset by 100 and increase the expense by 100. So I credit prepaid, which is an asset and I debit an expense, which is an expense. Now, what's my balance in my prepaid? My balance is 2300 and this is the correct balance. And what's my balance in my insurance expense? It's 100 and it's correct. So notice we prepare the adjusting entry to reflect this. Otherwise, the balance would have been 2400, which would be overstated and the balance here would have been zero, which is also overstated. So the balances would have been overstated for assets and I'm sorry, and understated for expenses, understated by 100. So it would show more assets and less expenses. So adjusting entries for prepaid, we debit, I'm just going to show you the debit and the credit, we debit insurance expense, expense goes up and we reduce the prepaid. Again, without those adjustments, assets are overstated, expenses are understated. Now, let's take a look at another prepaid account, prepaid account that happens to be supplied. Fast forward, purchase 9720 of supplies in December. Some of these were used in December. So we're starting with 9720. That's a step one. This is the current balance. What is the step two? Step two, what the balance should be? A physical count that unused supplies equal to 8670. So we counted the supplies and what we find out is we no longer have 9720. We use some of the supplies. Now we only have 8670. Do we need to make an adjustment? Yes. How much is the adjustment the difference? The difference is 1050. So we need to reduce our supplies by 1050, increase our expense by 1050. Now our supplies account show the proper balance based on the count of 8670. Once again, what we did here is we properly adjusted supplies, which we brought supplies down and we brought supplies expense up. So our supplies is correctly stated, it's not overstated and supplies expense is correctly stated, not understated. And this is the journal entry for supplies, expense debit goes up, supplies goes down. And again, those adjusting entries are done at the end of the year because the financial statements are prepared at the end of the year or at the end of the period, whatever the period we're assuming here, it's December 31st, whether it's monthly or yearly, it's December 31st. Once again, if we don't prepare those adjustments for the prepaid notice, if we don't prepare them for the prepaid notice, those adjustments for the prepaid notice, if we don't prepare them, assets are overstated, are overreported, which is not, we don't have 9720, we have 8670 and supplies are under, supplies expense are underreported. So if expenses are down, it means your net income is up, it means your equity is up. So you don't want to misstate your expenses, you don't want to misstate your income and you don't want to misstate your equity and you don't want to misstate your supplies. Now, in the next session, I would look at depreciation, which is a form of deferrals, which is a form of prepaid, but I like to keep depreciation separately. As always, if you like this recording, please like it, share it. I strongly encourage you to visit my website for additional resources. If you want to invest in your career, improve your grades, do better in school, give it a shot. Good luck and study hard. Accounting is worth it. It's difficult, but it's worth it.