identify assumptions and concepts and correct entries.
On December 31, SGI Company's fical year end, a 12-month insurance policy for the following year was purchased. The following entry was made:
DR. insurance expense $24000
CR. cash $24,000
If for the following year, the entry should have been to prepaid insurance, an asset account, not to insurance expense.
This is because the expense is not for the current year. The expense belongs in the next fiscal year.
Current year entry, should have been
DB Prepaid Insurance
CR Cash
To correct this entry,
DB Prepaid Insurance 24,000
CR Insurance Expense 24,000
This is assuming these are accounts you are supposed to use.
Thank u helper ^_^
You're welcome.
Assumptions:
1. The fiscal year end of SGI Company is on December 31.
2. A 12-month insurance policy was purchased on December 31 for the following year.
3. The insurance expense is recognized at the time of purchase.
4. The payment for the insurance policy was made in cash.
Concepts:
1. Fiscal Year: The 12-month period used by an organization for financial reporting purposes. In this case, SGI Company's fiscal year ends on December 31.
2. Insurance Expense: The cost incurred by a company for insuring its assets, liabilities, or operations. Insurance expense is recognized based on the matching principle, which states that expenses should be recognized in the same period as the related revenues.
3. Cash: The monetary asset that a company possesses, including physical currency and funds held in bank accounts.
Correct Entries:
The original entry made by SGI Company appears to be correct. It debits the insurance expense account by $24,000 and credits the cash account by the same amount. This correctly reflects the payment made for the 12-month insurance policy.