Prepaid insurance definition

prepaid insurance journal entry

Commonly a business expects to use, sell, or exhaust the current asset within the current accounting period therefore it is regarded as a current asset. In this way, they contribute to the calculation of the current ratio but they are excluded from the list of liquid assets. Assets that are generally expected to be used, sold, or depleted within the current accounting year (usually 12 months) are called current assets.

prepaid insurance journal entry

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Are prepaid insurance a current assets?

Prepaid expenses are recorded first on the balance sheet—in the prepaid asset account—because it represents a future benefit due to the business. Prepaid expenses are considered a current asset because they are expected to be consumed, used, or exhausted through standard business operations with one year. Prepaid Insurance is the amount of insurance premium that the company pays in one financial year, and avails its benefit in some other financial year, generally in the upcoming financial year. Prepaid Insurance journal entry is passed to record the amount paid as advance for the insurance. Prepaid insurance is treated as the asset of the firm and is recorded under the Asset side of the balance sheet.

For example,you paid a rent of $120,000 rent for a warehouse and showed an expense of $10,000 monthly on a balance sheet. At most companies, insurance is considered an operational expense and recorded on the income statement. However, the insurance company may require the customers to pay in advance. The advance payment is recorded as prepaid insurance on the customers’ financial statements. The prepaid insurance is the current assets on the company balance sheet.

Enter the monthly expense for each accounting period

In accounting, prepaid insurance is initially recorded as a debit to the “Prepaid Insurance” asset account and a credit to the “Cash” or “Bank” account. This reflects the fact that the company has made a payment in advance for insurance coverage, which increases the prepaid insurance asset but decreases the cash or bank balance. It will increase the insurance expense by $ 10,000 on income statement and reduce prepaid expenses from current assets.

prepaid insurance journal entry

However, they don’t need to worry about the accounting implications. A business buys one year of general liability insurance in advance, for $12,000. 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. In each successive month for the next twelve months, there should be a journal entry that debits the insurance expense account and credits the prepaid expenses (asset) account.

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