Problem: You are an accountant working for an advertising agency and you are working on the adjusting entries for the year ending December 31st. You notice that the prepaid insurance account is too high, because the policy has now been used up based on time. You paid for another year on January 1st, so the December 31 balance did not require any adjusting. Discuss whether this is accurate and what the effect will be of this behavior on the financial statements.
Q1. How are you going to correct last year's balance? Debit? Credit?
Q2. When you prepaid an expense and the prepaid expires on a certain month the accountant must credit the account when the prepaid expires. In this case the prepaid expired December 31 the accountant must credit the expense at the end of the fiscal period.