Introduction:
TechCo, a company that manufactures electronic gadgets, needs electricity to power their factory. Electricity is crucial for running the machines that produce their products. In this scenario, TechCo decided to pay their electricity bill in advance before using the electricity for the month of July.
The Situation:
TechCo received an electricity bill for the upcoming month of July. The total cost for the electricity was $5,000. To ensure there were no interruptions in their operations, TechCo paid the entire bill upfront before the electricity was consumed.
Case Facts:
Total cost of electricity for July: $5,000
Payment method: Full payment before consuming the electricity.
Total cost: $5,000
Payment method: Full payment in advance.
Question for You:
Now, let’s think about how TechCo would record this transaction in their accounting books according to IFRS (International Financial Reporting Standards). TechCo needs to make two journal entries:
When TechCo makes the payment before consuming the electricity:
Debit: Prepaid Expense (Utilities) for $5,000
Credit: Cash/Bank for $5,000
When TechCo consumes the electricity:
Debit: Utilities Expense for $5,000
Credit: Prepaid Expense (Utilities) for $5,000
Can You Figure Out the IFRS Journal Entries?
Based on the information provided:
When TechCo makes the payment in advance:
Debit: Prepaid Expense (Utilities) for $5,000
Credit: Cash/Bank for $5,000
When TechCo consumes the electricity during the month of July:
Debit: Utilities Expense for $5,000
Credit: Prepaid Expense (Utilities) for $5,000
This case study shows how businesses record their expenses when they pay for services in advance. By recording the payment as a prepaid expense, TechCo ensures that the cost of the electricity is properly recognized when it is actually used, helping them keep their financial records accurate and up-to-date.
Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.
Comments