01 / Learn the method
Learning outcomes
Put expense in the service period, even when the invoice and payment dates disagree. Calculate the result, reconcile it and communicate its limitations.
Method
For this exercise recognize service expense evenly over the stated coverage period. A payment for future coverage is a prepaid asset; service received but not yet invoiced creates an accrued liability. Document the service dates before choosing an entry. The rules below are case assumptions, not a claim of compliance with every accounting framework.
Smaller worked example
A separate $1,200 policy covers 12 months from 1 July. At 31 July, expense is $100 and the remaining prepaid asset is $1,100. Paying the premium does not make all $1,200 July expense.
02 / Put it to work
Business context and rules
Close September 2026 for fictional Northline Studio. The $12,000 annual insurance policy starts 1 September and was incorrectly expensed in full when paid. Rent of $9,000 covering September-November was correctly posted entirely to Prepaid rent; no amortization was recorded. September utilities of $1,800 and consulting of $2,400 were received but not invoiced or posted; invoices arrive 5 October. September wages of $3,000 are earned but unpaid and unrecorded. No opening accruals or prepayments exist. Assume no tax, VAT, interest or other adjustments.
Original synthetic inputs
| Input | Value | Unit |
|---|---|---|
| Annual insurance paid | 12000 | USD |
| Insurance coverage | 12 | months |
| Rent paid for September-November | 9000 | USD |
| Rent coverage | 3 | months |
| September utilities estimate | 1800 | USD |
| September consulting received | 2400 | USD |
| September unpaid wages | 3000 | USD |
Required deliverables
Submit the expense / balance-sheet schedule, five dated adjusting entries, and a 150-word close note explaining estimates and October reversal or settlement. Do not record a second cash payment.
Use formulas for derived amounts and preserve source data. Put narrative deliverables in the workbook response area; expand it as needed. Compare amounts within 0.01 of the stated unit and percentages within 0.1 percentage point. No unsupported balancing plugs.
Workbook structure
The student workbook intentionally leaves the analysis structure open. Build the schedules required above, retain the source inputs, and add formula-based checks. You may add worksheets. The worked solution is one acceptable structure, not the only correct layout.
03 / Review your work
Try the assignment before opening the answer.
Open the worked answer and notes
Worked numerical schedule
| Measure | Value | Unit |
|---|---|---|
| September insurance expense | 1,000.00 | USD |
| Closing prepaid insurance | 11,000.00 | USD |
| September rent expense | 3,000.00 | USD |
| Closing prepaid rent | 6,000.00 | USD |
| Total new accrued liabilities | 7,200.00 | USD |
| Total correct September expense for these items | 11,200.00 | USD |
| Change in expense versus posted ledger | -800.00 | USD |
| Total closing prepayments | 17,000.00 | USD |
| Coverage cost reconciliation | 0.00 | USD |
Interpretation and recommended actions
September expense is $11,200. Debit Prepaid insurance / credit Insurance expense $11,000; debit Rent expense / credit Prepaid rent $3,000; debit Utilities expense / credit Accrued utilities $1,800; debit Consulting expense / credit Accrued consulting $2,400; debit Wages expense / credit Wages payable $3,000. Net expense falls $800 versus the posted $12,000. Assets rise $8,000 and liabilities rise $7,200; equity increases $800. In October reverse accruals before recording invoices, or clear the accrued liability directly; do not do both. Obtain invoice support and reconcile estimate differences.
Scoring rubric - 100 points
| Dimension | Points | Awarding guidance |
|---|---|---|
| Calculation | 40 | Expense schedule 15; prepayments 10; accrual totals 5; five adjusting amounts 10. |
| Interpretation | 25 | Correct application of the case rules 10; explain the business decision 10; identify evidence or limitations 5. |
| Controls / audit trail | 20 | Traceable formulas 8; independent reconciliation 8; explicit units and signs 4. |
| Communication | 15 | Decision and numerical headline 5; actions with owners and evidence 5; concise response covering all required deliverables 5. |
Award method credit after an isolated arithmetic error rather than repeatedly deducting for it. Equivalent account labels and well-supported alternative recommendations are acceptable. Numerical tolerance is 0.01 in the stated units; no universal passing score is prescribed.
Common mistakes
Expensing cash payments immediately; expensing October invoices twice; treating a reversal as forgiveness of the obligation.
Staged hints
Map coverage months first. Separate each item’s current posting from its required closing balance. The adjustment is the difference.
Instructor notes
Prerequisites: Double entry and basic P&L. The total duration of 60 minutes is a planning estimate, not a tested completion time. Allocate class time according to prior knowledge and reserve time for discussion of the decision and evidence.
For a simpler class, provide the model structure and work through one driver. For an extension, change one operational assumption and require a new reconciliation and recommendation. Verify the new key before distributing any variant. Open files in the intended spreadsheet application before class. Solutions are learning resources, not secure hiring examinations.
Decision
Recognize September services as September expenses and retain future insurance/rent benefits as prepaid assets.
Evidence and reasoning
Payment timing is not the expense-recognition rule. The insurance payment covers future months, while unbilled utilities, consulting and wages relate to work already received. Accrual reversal and direct liability clearance are alternatives, not cumulative steps.
What would change the conclusion
Service dates, contract coverage or final invoices may change the accrual estimates. Reconcile differences to evidence before posting any adjustment.
Related learning
Version 1.1. Synthetic teaching case. Completion time is an estimate.