Prepaid Insurance Definition, Journal Entries Is it an Asset?

Prepaid insurance is treated as the asset of the firm and is recorded under the Asset side of the balance sheet. Likewise, the journal entry for the insurance expense that is converted from the expiration cost of prepaid insurance is the debit of the insurance expense account and the credit of the prepaid insurance account. You would record an expense when the benefit of the goods or services has been consumed or utilized within the current accounting period.

Bookkeeping

This helps ensure that companies are accurately accounting for their assets while also staying up-to-date with any upcoming liabilities. The payment of expense in advance increases one asset (prepaid or unexpired expense) and decreases another asset (cash). Likewise, the net effect of the prepaid insurance journal entry in this example is zero on the balance sheet. Additionally the double entry accounting journals used above are more fully explained in our prepaid expense journal entry example.

• This is due to, under the accrual basis of accounting, the expense should only be recorded when it occurs.
• Organizations typically use a prepaid expense ledger to monitor the total amount of money spent on prepayments, when payments are due, and when they will be received.
• The prepaid insurance expense is almost always classified as a current asset due to the fact that the insurance fee usually covers a period of up to 1 year after which the company makes the payment again for the next period.
• The following journal entry will be passed and reflected in the books of accounts of XYZ company.

Why are prepaid expenses recorded as assets?

The prepaid insurance will be recorded when the company makes payment to the insurance company. The prepaid insurance expense is almost always classified as a current asset due to the fact that the insurance fee usually covers a period of up to 1 year after which the company makes the payment again for the next period. The accounting process for booking prepaid expenses is to initially record the payment as an asset and then gradually reduce that balance over time as the goods or services are used. Unexpired or prepaid expenses are the expenses for which payments have been made, but full benefits or services have yet to be received during that period. In this journal entry, the company records the prepaid insurance as an asset since it is an advance payment which the company has not incurred the expense yet.

• As the business begins to use the service, the expense begins to accrue, and the prepaid amount gets deducted accordingly.
• The accounting process for booking prepaid expenses is to initially record the payment as an asset and then gradually reduce that balance over time as the goods or services are used.
• By recording them accurately and allocating them properly, businesses can avoid problems down the road.
• Likewise, the adjusting entry at the end of the period is necessary for the company to recognize the cost that expires through the passage of time.
• Prepaid expenses also arise when a business buys items such as stationery for use within the business.
• The company can record the prepaid insurance with the journal entry of debiting the prepaid insurance account and crediting the cash account.

Is Prepaid Insurance an Asset?

The prepaid insurance will be allocated to the insurance expense base on the coverage time. The balance will be reversed from prepaid insurance to expense on the income statement. Consequently, at the end of the month of January, when the company wants to record the insurance expense for the month, they will need to divide the amount paid ie. $24,000 by 12 months which will give the insurance expense for each month that is $2,000. Generally, Prepaid Insurance is a current asset account that has a debit balance.

Prepaid Expenses FAQs

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• The balance will be reversed from prepaid insurance to expense on the income statement.
• Common examples of prepaid expenses include prepaid rent, insurance premiums, subscriptions, and prepaid supplies.
• Passing adjustment entries to balance the books of accounts is often helpful, preventing one from making an entry for new business transactions.
• This recognition typically occurs through the process of adjusting journal entries, where a portion of the prepaid expense is moved from the balance sheet to the income statement as an expense.

Method 2

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The debit entry to insurance expense will result in adding the expenses whereas credit to the prepaid expense account will result in decreasing the current asset. Similarly, a prepaid insurance expense is a prepaid expense that has been paid for by QuickBooks the company. Prepaid insurance is essentially a part of the insurance premium or a fee that is paid by the company in advance as a part of the insurance agreement for an extended period of time. The company can record the prepaid insurance with the journal entry of debiting the prepaid insurance account and crediting the cash account.