pays $1,200 for one year of fire insurance which covers from September 01, 2020. ![]() Exampleįor example, on September 01, 2020, the company ABC Ltd. This adjusting entry is necessary for the company to not overstate its total assets as well as to not understate its total expenses during the period. Account Debit Credit Insurance expense 000 Prepaid insurance 000 Likewise, the company can make insurance expense journal entry by debiting insurance expense account and crediting prepaid insurance account. Insurance expense journal entryĪt the end of each month, the company usually make the adjusting entry for insurance expense to recognize the cost of that has expired during the period. 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. Prepaid insurance and cash are both balance sheet items. Account Debit Credit Prepaid insurance 000 Cash 000 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. 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. ![]() 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. In this case, it needs to account for prepaid insurance by properly making journal entries in order to avoid errors that could lead to misstatement on both balance sheet and income statement.Īt 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. And the company is usually required to pay an insurance fees for one year or more in advance. The company usually purchases insurance to protect itself from unforeseen incidents such as fire or theft.
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