Adjusting Entry for Prepaid Insurance Cooper Inc recorded thepurchase of a three-year insurance policy on

The payment is entered on November 20 with a debit of $2,400 to prepaid insurance and a credit of $2,400 to cash. As of November 30, none of the $2,400 has expired and the entire $2,400 will be reported as prepaid insurance. 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 prepaid insurance journal entry adjustments the credit of the prepaid insurance account. The debit entry to the insurance expense will result in adding the expenses, whereas the credit to the prepaid expense account will result in decreasing the current asset.

• 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.
• If the prepayment covers a longer period, the portion of the prepaid insurance that will not be charged to expense within one year should be classified as a long-term asset.
• This process is repeated each month until the insurance is fully expensed and the prepaid insurance asset account balance is zero.
• Rather, any prepaid rent pertaining to a long-term lease would be rolled into the ROU asset balance recognized on the balance sheet.

Record prepaid insurance with journal entry

As the insurance coverage period elapses, the expired portion is moved from the current asset account to the income statement account as an expense. This is typically done at the end of each accounting period through an adjusting entry. Prepaid insurance is usually charged to expense on a straight-line basis over the term of the related insurance contract. When the asset is charged https://x.com/BooksTimeInc 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.

• So, Prepaid expenses entry, represent expenditures that have not been recorded by a company as an expense but have been paid for in advance.
• By definition, current prepaid assets would be included in the numerator, or current assets portion of the current ratio, and positively affect the results.
• Such expenses are known as prepaid expenses which are one of the types of adjusting entries in accounting.
• In these scenarios the portion of the prepaid obligation which exceeds 12 months is recognized as a long-term or noncurrent asset.
• Prepaid expenses, or Prepaid Assets as they are commonly referred to in general accounting, are recognized on the balance sheet as an asset.

Adjusting Entries – Asset Accounts

Rather, they provide value over time; generally over multiple accounting periods. The reason is that the expense expires as you use it, thus, you can’t expense the entire value of the prepaid service immediately. So when making a journal entry for prepaid insurance, you record the prepaid expense in your business financial records and adjust entries as you use up the service. The prepaid insurance journal entry follows the same accounting principle for all prepaid expenses.

• It is important to consider what basis of accounting an organization is operating under when assessing how to account for prepaid expenses.
• The prepaid insurance expense account under the current assets in the balance sheet will still show the amount of $16,000.
• This prepaid account will come to the NIL balance at the end of the accounting period and all the expenses accrued in the income statement.
• However, under the accrual basis of accounting, the balance sheet must report all the amounts the company has an absolute right to receive—not just the amounts that have been billed on a sales invoice.
• As the prepaid insurance gets consumed over time, it gets gradually recognized as an expense on the income statement.

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In each of the successive months, equal parts insurance will continue to be credited from the prepaid insurance account. However, if in case the company pays for more than a year, then the prepaid expense will no longer be a part of the current asset. Regardless, the company must make adjusting entries to record insurance expense matched to each month and transfer it from prepaid insurance to insurance expense account. 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.

• The amount charged to expense in each accounting period is only the portion of the prepaid insurance asset assigned to that period.
• Prepaid insurance is an asset account on the balance sheet, in which its normal balance is on the debit side.
• As mentioned above, the premiums or payment is recorded in one accounting period, but the contract isn’t in effect until a future period.
• In most cases, this is the correct entry to book, however, in certain transactions we are paying upfront for the right to use an asset or receive a service over a defined period of time.
• Note that in this example we established a short-term and long-term prepaid component because the initial payment was for a two-year subscription.
• Equipment will be depreciated over its useful life by debiting the income statement account Depreciation Expense and crediting the balance sheet account Accumulated Depreciation (a contra asset account).

On the other hand, liabilities, equity, and revenue are increased by credits and decreased by debits. A related account is Supplies Expense, which appears on the income statement. The amount in the Supplies Expense account reports the amounts of supplies that were used during the time interval indicated in the heading of the income statement. Julia https://www.bookstime.com/ Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. Take note that the amount has not yet been incurred, thus it is proper to record it as an asset.

Prepaid Assets

This is typically done for large purchases, and the expense is recorded as a depreciation expense each month. 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. Notice that the amount for which adjustment is made differs under two methods, but the final amounts are the same, i.e., an insurance expense of $450 and prepaid insurance of $1,350. On 1 September 2019, Mr. John bought a motor car and got it insured for one year, paying $4,800 as a premium. When he paid this premium, he debited his insurance expenses account with the full amount, i.e., $4,800.