What is prepaid insurance?

If you’re using manual ledgers for your accounting, you can create a spreadsheet outlining your monthly expenses that will need to be recorded in your general ledger as an adjusting entry. This means positive values for assets and expenses are debited and negative balances are credited. For example, upon the receipt of $1,000 cash, a journal entry would include a debit of $1,000 to the cash account in the balance sheet, because cash is increasing. Your next step would be to record the insurance expense for the next 12 months.

• However, during normal course of the business, insurance is generally a prepaid expense, because it is paid in advance, in most cases.
• It is an expense of personal nature and is debited to drawings A/c.
• This requires them to record prepaid insurance as an expense only.
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• When the debit to the Prepaid Expense account is posted to the general ledger, the Prepaid Expense account will have a debit balance of $600.

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Prepaid Insurance in Balance Sheet

The initial journal entry for prepaid rent is a debit to prepaid rent and a credit to cash. Prepaid expenses represent expenditures that have not yet been recorded by a company as an expense, but have been paid for in advance. In other words, prepaid expenses are expenditures paid in one accounting period, but will not be recognized until a later accounting period. Prepaid expenses are initially recorded as assets, because they have future economic benefits, and are expensed at the time when the benefits are realized (the matching principle). Generally, Prepaid Insurance is a current asset account that has a debit balance. The debit balance indicates the amount that remains prepaid as of the date of the balance sheet.

In the case where there are payments that need to be made by the organization to the suppliers (or service providers), it is regarded as a Current Liability in the Balance Sheet. Alternatively, if the organization has paid in advance for a particular service, it is disclosed as a Current the event planner Asset. The insurance policy of $600 covers one-year period as of December 31. It means that the insurance policy of $50 ($600 ÷ 12) will expire each month and should be recorded as an expense. Prepaid insurance is coverage you pay for in full before you receive its benefits.

Definition of Prepaid Insurance

Although it is called an “expense”, accrual-based accounting should record a prepaid expense or prepayment initially as an asset. At the end of the period, prepaid expense accounts usually require adjustments to reflect the “consumed” or “used-up” portion as expenses in the current period. On December 31, an adjusting entry will show a debit insurance expense for $400—the amount that expired or one-sixth of $2,400—and will credit prepaid insurance for $400. This means that the debit balance in prepaid insurance on December 31 will be $2,000.

A company shouldn’t advance too much as it may reflect badly on the profitability. A current asset which indicates the cost of the insurance contract (premiums) that have been paid in advance. It represents the amount that has been paid but has not yet expired as of the balance sheet date.

What is the entry for insurance paid?

At the end of the accounting period, an adjusting entry is required to record the expired portion of the asset as an expense. On July 1, the company receives a premium refund of $120 from the insurance company. The company records the refund with a debit to Cash and a credit to Prepaid Insurance. At December 31, the balance in Prepaid Insurance will be a credit balance of $120, consisting of the debit of $2,400 on January 1, the 12 monthly credits of $200 each, and the $120 credit on July 1. Prior to issuing the December 31 financial statements, the company must remove the $120 credit balance in Prepaid Insurance by debiting Prepaid Insurance and crediting Insurance Expense. Every company pays insurance premiums either monthly, quarterly, or annually.

Prepaid insurance (and how it’s accounted for in the balance sheet) isn’t something the majority of us need to worry about. However if you are using the accrual basis accounting method at your company, then prepaid insurance might come into play. Simply add it as a current asset as long as it’ll be used up within the year.

How Would You Journalize Expired Insurance?

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