Step 4

Here we reverse a payable set up in the previous year, and record a payable and prepaid for the current year.

Reversing the Prior Year Payable

According to the facts given us: "of the Spring Fling expenditures recorded in the 2000 synoptic, $100 related to the 1999 program."

We will assume that a payable was set up in 1999 for $100 and an expense was recorded. And we can look at our opening balances and see that indeed we did have a payable for $100 set up in 1999.

We now need to remove the payable and the expense from the year 2000, as the amount has now been paid and the expense was already recorded in the prior year. We will make the following entry, reversing the expense and the payable:

  dr cr
Accounts payable 100  
Spring Fling expenses   100

Setting up a Payable and a Prepaid

Normally when one records a payable, one would record a payable and the related expense. The usual entry is:

dr. expense $X
cr. accounts payable $X

However in this case we are asked to pay in advance for an expense of the following year. As we are told: "also just before the 2000 year-end, SpringTime received an invoice for $100 for the 2001 Spring Fling expenses, the invoice was payable on receipt."

It may seem strange to record a transaction where there is no effect on the income statement. Furthermore, it seems strange to call an item prepaid when it hasn’t been paid. But generally accepted accounting principles call for the use of accrual accounting even where there is no recognition of revenue or an expense. (1000.46) We must therefore record the following transaction, setting up the prepaid expense and the payable:

  dr cr
Prepaid expenses 100  
Accounts payable   100

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