Account Debit Credit Insurance expense $$$ Prepaid insurance $$$ Prepaid insurance exampleįor example, on December 18, 2020, the company ABC make an advance payment of $6,000 for the fire insurance that it purchase to cover the whole year of 2021. 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. 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.Īs the prepaid insurance expires throughout the passage of time, the company needs to transfer the prepaid insurance that has expired in the period to the insurance expense. Account Debit Credit Prepaid insurance $$$ Cash $$$ The company can record the prepaid insurance with the journal entry of debiting the prepaid insurance account and crediting the cash account.
Record prepaid insurance with journal entry This means the company should record the insurance expense at the period end adjusting entry when a portion of prepaid insurance has expired. The insurance expense incurs throughout the passage of time. This is due to, under the accrual basis of accounting, the expense should only be recorded when it occurs.
The company should not record the advance payment as the insurance expense immediately. Prepaid insurance is an asset account on the balance sheet, in which its normal balance is on the debit side. In this case, it is important for the company to record the payment as prepaid insurance. In the business, the company usually needs to make an advance payment for the insurance that it has purchases.
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