Adjustment Entry for Prepaid Expenses.
| Sr. No. | Nature | Payment Date | Period of Insurance (a) | Amount (b) | Prepaid Period (c) | Prepaid Amt (b)/(a)*(c) =(d) | Amt for Current Year (b)-(d)=(e) |
| :------ | :-------- | :----------- | :------------------------------------- | :--------- | :----------------------------------- | :----------------------------- | :----------------------------- |
| 1. | Insurance | 01-12-2024 | 01-12-2024 to 31-05-2025 (6 Months) | 18000/- | 01-04-2025 to 31-05-2025 (2Months) | 6000/- | 12000/- |
Other Adjustment Entries.
31-03-2025 Transfer the Balance of Dr. Sharda Varma Drawing A/c to Dr. Sharda Varma Capital A/c of ₹ 49,500/-
Closing Entry.
31-03-2025 Transfer the Balance of Profit & Loss Accounts to Dr. Sharda Varma Capital A/c of ₹ 64,621/-
■ PROFIT & LOSS A/C
Profit & Loss Transfer Amount ₹ 64,621/-
Answer (1)
To address the question regarding the adjustment entries for prepaid expenses, particularly insurance, let's break this down step by step.
Prepaid Expenses : Prepaid expenses are payments made for goods or services to be received in the future. These are initially recorded as assets because they provide future economic benefits.
Adjustment Entry for Prepaid Insurance : For the listed prepaid insurance:
Nature : Insurance
Payment Date : December 1, 2024
Period of Insurance : From December 1, 2024, to May 31, 2025 (6 months)
Prepaid Period : From April 1, 2025, to May 31, 2025 (2 months)
Amount : ₹18,000
Calculation for Prepaid and Current Year Amounts :
Total insurance coverage is for 6 months, from December 1, 2024, to May 31, 2025.
The cost for this 6-month policy is ₹18,000.
To calculate the monthly cost :
Monthly cost = Number of Months Total Amount = 6 18 , 000 = ₹3 , 000
Prepaid insurance for 2 months (April 1, 2025, to May 31, 2025) :
Prepaid Amount = Monthly cost × Prepaid Months = 3 , 000 × 2 = ₹6 , 000
Amount applicable to the current year (December 1, 2024, to March 31, 2025), which is 4 months :
Current Year Amount = 18 , 000 − 6 , 000 = ₹12 , 000
Journal Entry for Adjustment (As on March 31, 2025):
Debit : Insurance Expense Account with ₹12,000
Credit : Prepaid Insurance Account with ₹12,000
This adjustment ensures that only the expense for the current accounting period is recognized while the prepaid portion is carried forward as an asset.
Other Adjustment Entries :
Transfer of Drawing Account :
Debit: Capital Account of Dr. Sharda Varma with ₹49,500
Credit: Drawing Account of Dr. Sharda Varma with ₹49,500
Transfer of Profit & Loss Account :
Debit: Profit and Loss Account with ₹64,621
Credit: Capital Account of Dr. Sharda Varma with ₹64,621
These entries help in accurately representing the business's financial standing and comply with the matching principle by aligning expenses with their relevant periods.
The closing entries ensure the transfer of personal drawings to the capital account and the net profit to the owner's equity, thus preparing the accounts for the next financial period.
