Prepaid insurance appears on the balance sheet, which presents a company’s financial position at a specific point in time. As an asset that is expected to be consumed or converted into cash within one year or one operating cycle, it is typically classified as a current asset. The balance reported for prepaid insurance on the balance sheet will decrease over time as portions of it are recognized as expenses. When a business initially pays for an insurance policy in advance, the accounting treatment reflects an exchange of one asset for another. To record this transaction, the Prepaid Insurance account is increased, and the Cash account is decreased. In the double-entry accounting system, increasing an asset account requires a debit, while decreasing another asset account requires a credit.

Normal Balance Examples

• Here are the Prepaid Insurance and Insurance Expense ledgers AFTER the adjusting entry has been posted.
• Each of the accounts in a trial balance extracted from the bookkeeping ledgers will either show a debit or a credit balance.
• Understanding how financial transactions are recorded is fundamental to accurate financial reporting.
• When an insurance premium covers a period extending beyond the current accounting cycle, such as an annual policy paid upfront, it is initially recorded as an asset.
• Although each account has a normal balance in practice it is possible for any account to have either a debit or a credit balance depending on the bookkeeping entries made.
• An insurance premium amount is paid by a company to protect the firm against business losses or provide coverage for the health of employees.
• A nominal account represents any accounting event that involves expenses, losses, revenues, or gains.

It is acceptable to put money received into an expense account when it makes sense to do so, as it does in this instance. You can put the insurance check back onto the same expense account that the original repairs were coded to which will offset that expense. While you can record insurance entries manually, accounting software automates the process.

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• Prepaid insurance is credited to reduce the asset, reflecting there is now less unused insurance.
• Its initial value, and the amount in the journal entry for the purchase, is what it costs.
• Note that the par value of the stock may be a very minimal amount per share.
• At the end of the month 1/12 of the prepaid rent will be used up, and you must account for what has expired.
• The $100 balance in the Insurance Expense account will appear on the income statement at the end of the month.
• A trial balance is a statement that lists all the general ledger accounts and their balances, showcasing the equality between debits and credits.
• In this case, the asset is recorded as an insurance Receivable as a Debit entry account.

Is Prepaid Insurance an Asset?

This “Prepaid Insurance” asset reflects that the benefit of the insurance coverage has not yet been fully utilized. Prepaid insurance is typically classified as a current asset on the balance sheet if the coverage period is one year or less. As the prepaid expense is used or consumed over time, it needs to be adjusted to reflect the actual expense incurred. This involves a debit to an expense account (an income statement account) and a credit to a prepaid expense account (a balance sheet account). This reduces the prepaid expense balance but increases the expense balance.

You prepaid a one-year insurance policy during the month and initially recorded it as an asset because it would last for more than one month. By the end of the month some of the insurance expired, so you reduced the value of this normal balance asset to reflect what you actually had on hand at the end of the month ($1,100). To transfer what expired, Insurance Expense was debited for the amount used and Prepaid Insurance was credited to reduce the asset by the same amount. Any remaining balance in the Prepaid Insurance account is what you have left to use in the future; it continues to be an asset since it is still available. Hence, prepaid insurance journal entry does not affect the total assets because it increases one asset account and decreases another asset account at the same amount.

What Is Relevant Range in Accounting?

Prepaid expenses refer to the advance payment of goods or services the benefits of which shall be received in the future. Prepaid expenses are considered assets on the balance sheet because they represent items paid for in advance that will become expenses over time as they are used or consumed. The cash account is debited because Oil And Gas Accounting cash is deposited in the company’s bank account.

• Rather than recording the item as an expense when you purchase it, you record it as an asset (something of value to the business) since you will not use it all up within a month.
• Journal entry is the formal recording of financial transactions in the accounting system.
• Prepaid insurance is usually charged to expense on a straight-line basis over the term of the related insurance contract.
• On the balance sheet, assets usually have a debit balance and are shown on the left side.
• Insurance is the expense that company purchases from the insurance provider in exchange for the insurance service.

The reverse of unexpired insurance will depend on the consumption of insurance services over the period. At the payment date of prepaid insurance, the net effect is zero on the balance sheet; and there is nothing to record in the income statement. However, after adjusting entry at the end of the period for the insurance expense, the asset account will decrease while the expense account will increase. 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.