Prepaid Insurance Journal Entry

When a prepaid insurance contract is initially recorded, the journal entry is a debit to the prepaid insurance (asset) account and a credit to the cash (asset) account. As the coverage period progresses, the prepaid insurance is gradually charged to expense. This is done through a journal entry that debits the insurance expense account and credits the prepaid insurance account. The amount charged to expense in each accounting period is only the portion of the prepaid insurance asset assigned to that period.

Insurance journal entry: Prepaid insurance definition

Key types include deferrals, where cash is received before revenue or expenses are recognized, and accruals, where expenses or revenues are recorded before cash is exchanged. Prepaid expenses, such as rent or insurance, are classified as assets until the benefit is realized. For example, if $12,000 is paid for a year of rent, the monthly expense is $1,000. After four months, an adjusting entry would debit rent expense for $4,000 and credit prepaid rent, reflecting the used portion of the asset.

Of the total six-month insurance amounting to $6,000 ($1,000 per month), the insurance for 4 months has already expired. In the entry above, we are actually transferring $4,000 from the asset to the expense account (i.e., from Prepaid Insurance to Insurance Expense). In preparing the adjusting entry, our goal is to transfer the used part from the asset initially recorded into expense – for us to arrive at the proper balances shown in the illustration above.

Prepaid insurance journal entry: example 2

• This is done through a journal entry that debits the insurance expense account and credits the prepaid insurance account.
• For example, if a company purchases a machine expected to last ten years, the cost of that machine is spread out over its useful life rather than being expensed all at once.
• The same principle applies to other prepaid costs such as rent or subscriptions.

The same principle applies to other prepaid costs such as rent or subscriptions. It refers to the portion of the outstanding insurance premium paid by the company in advance and is currently not due. The “Service Supplies Expense” is an expense account while “Service Supplies” is an asset. After making the entry, the balance of the unused Service Supplies is now at $600 ($1,500 debit and $900 credit). 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.

What is the difference between deferrals and accruals in adjusting journal entries?

When the asset is charged to expense, the journal entry is to debit the insurance expense account and credit the prepaid insurance account. Thus, the amount charged to expense in an accounting period is only the amount of the prepaid insurance asset ratably assigned to that period. The initial entry is a debit of $12,000 to the prepaid insurance (asset) account, and a credit of $12,000 to the cash (asset) account.

At the end of any accounting period, the amount of the insurance premiums that remain prepaid should be reported in the current asset account, Prepaid Insurance. The prepaid amount will be reported on the balance sheet after inventory and could part of an item described as prepaid expenses. Let’s assume that a company is started on December 1 and arranges for business insurance to begin on December 1. On December 1 the company pays the insurance company $12,000 for the insurance premiums covering one year. To adjust prepaid rent, you need to account for the portion of the rent that has been used up over time.

Introduction to Adjusting Journal Entries and Prepaid Expenses: Videos & Practice Problems

• This is done by making adjusting entries at the end of each month or accounting period.
• On November 30, none of the $2,400 has expired, and the entire amount is reported on the balance sheet as Prepaid Insurance.
• This means the entire rent expense is recorded immediately, even if the space has not yet been used.
• The insurance expense account is debited $400 and the prepaid insurance account is credited $400.
• In the entry above, we are actually transferring $4,000 from the asset to the expense account (i.e., from Prepaid Insurance to Insurance Expense).
• GVG Company acquired a six-month insurance coverage for its properties on September 1, 2021 for a total of $6,000.

Prepaid insurance is the portion of an insurance premium that has been paid in advance and has not expired as of the date of a company’s balance sheet. This unexpired cost is reported in the current asset account Prepaid Insurance. Because they represent a future benefit owed to the company, companies list prepaid expenses first on the balance sheet in the prepaid asset account.

Therefore the account Accumulated Depreciation – Equipment will need to have an ending balance of $9,000. The income statement account that is pertinent to this adjusting entry and which will be debited for $1,500 is Depreciation Expense – Equipment. At the end of the month, before the books are closed for the month, make one double entry to the journal. If the premium were $1,200 per year, you would enter adjusting entries for prepaid insurance a credit of $100 to the prepaid insurance asset account, decreasing its value.

What are the adjusting entries for prepaid insurance? (Example and Explanation)

Likewise, the company can make insurance expense journal entry by debiting insurance expense account and crediting prepaid insurance account. Prepaid insurance is an insurance premium paid by a company during an accounting period that doesn’t expire within that same period. It is considered an asset on a company’s balance sheet, specifically a current asset, because it is not yet used. Understanding prepaid expenses is crucial for accurate financial reporting and maintaining the integrity of financial statements. Adjusting journal entries are essential in the accrual accounting system, ensuring that accounts reflect the passage of time accurately. These entries are necessary to update account balances that may not represent the current financial situation due to the timing of cash transactions.

Income Statement Under Absorption Costing? (All You Need to Know)

The company must continue to make appropriate journal entries to apportion the prepaid insurance expense according to the time period during which the expense will continue to accrue. This is usually done by the accounting department at the end of each financial year by using an adjusting journal entry. When the company makes an advance payment for insurance, it can make prepaid insurance journal entry by debiting prepaid insurance account and crediting cash account. Deferrals involve cash transactions occurring before the related revenue or expense is recognized.