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Illustration 7 of final accounts of sole proprietorship Prepaid insurance were credited in the P&l account . prepaid expenses were supposed to be debited and adjusted to the respective expenses . explain this to me ?
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Illustration 7 of final accounts of sole proprietorship Prepaid insura...
&L account

Prepaid expenses are those expenses that have been paid in advance for a future period. For example, if a business pays rent for the next six months in advance, this amount would be considered a prepaid expense.

In the final accounts of a sole proprietorship, prepaid expenses are shown as an asset on the balance sheet and are deducted from the relevant expense in the profit and loss (P&L) account.

Illustration 7:

Let's say that a business paid $12,000 for rent for the next six months in advance. In the P&L account, the rent expense for the year would be recorded as $24,000. However, since half of this amount has already been paid in advance, the prepaid rent expense of $12,000 would be deducted from the total rent expense in the P&L account, resulting in a net rent expense of $12,000.

In this case, the prepaid expense of $12,000 would be shown as an asset on the balance sheet under the heading "Prepaid Rent".

Therefore, the final accounts of the sole proprietorship would show the following:

Profit and Loss Account:
Rent Expense: $24,000
Less: Prepaid Rent: ($12,000)
Net Rent Expense: $12,000

Balance Sheet:
Current Assets:
Prepaid Rent: $12,000

It is important to note that the prepaid expense will be gradually expensed over the period to which it relates. In this case, the prepaid rent of $12,000 will be expensed over the next six months at a rate of $2,000 per month.
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Illustration 7 of final accounts of sole proprietorship Prepaid insurance were credited in the P&l account . prepaid expenses were supposed to be debited and adjusted to the respective expenses . explain this to me ?
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Illustration 7 of final accounts of sole proprietorship Prepaid insurance were credited in the P&l account . prepaid expenses were supposed to be debited and adjusted to the respective expenses . explain this to me ? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Illustration 7 of final accounts of sole proprietorship Prepaid insurance were credited in the P&l account . prepaid expenses were supposed to be debited and adjusted to the respective expenses . explain this to me ? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Illustration 7 of final accounts of sole proprietorship Prepaid insurance were credited in the P&l account . prepaid expenses were supposed to be debited and adjusted to the respective expenses . explain this to me ?.
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