Which of the following situations requires an adjusting entry that is not a prepayment or an accrual entry?

• A. Recognizing interest earned but not yet received
• B. Adjusting for prepaid insurance that has expired
• C. Recording revenue for services performed but not yet billed
• D. Recording depreciation expense on equipment

Answer: (D)

Verified step by step guidance

1. Understand the concept of adjusting entries: Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are recognized in the period they are incurred, following the accrual basis of accounting.
2. Identify the types of adjusting entries: Adjusting entries typically fall into four categories: prepayments (prepaid expenses and unearned revenues), accruals (accrued revenues and accrued expenses), depreciation, and other adjustments.
3. Focus on the situation described in the problem: Recording depreciation expense on equipment is not a prepayment or an accrual entry. Depreciation is an allocation of the cost of a tangible asset over its useful life, reflecting the wear and tear or obsolescence of the asset.
4. Determine the journal entry for depreciation: The adjusting entry for depreciation involves debiting the Depreciation Expense account and crediting the Accumulated Depreciation account. This reduces the book value of the asset and recognizes the expense in the current period.
5. Understand why this is not a prepayment or accrual: Depreciation does not involve cash transactions or timing differences between cash flows and revenue/expense recognition. It is a systematic allocation of cost based on the asset's useful life.