Definition of Prepaid Insurance As the amount of prepaid insurance expires, the expired portion is moved from the current asset account Prepaid Insurance to the income statement account Insurance Expense. This is usually done at the end of each accounting period through an adjusting entry.

Why do prepaid expense accounts have to be adjusted?

They do not record new business transactions but simply adjust previously recorded transactions. Adjusting entries for prepaid expenses are necessary to ensure that expenses are recognized in the period in which they are incurred. Due to the nature of certain goods and services, prepaid expenses will always exist.

What is the adjusting entry for prepaid expenses?

Usually the adjusting entry for prepaid expenses will be a credit to Prepaid Expenses and a debit to the appropriate expense account(s). For instance, if Prepaid Expenses involve the prepayment of insurance premiums the adjusting entry will include a debit to Insurance Expense. 388,503.

How does prepaid insurance affect the balance sheet?

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.

How does prepaid insurance journal entry affect total assets?

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. At 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.

How are prepaid expenses treated in final accounts?

Insurance prem. paid on 30th Jun YYYY – 1200 for a year (50% prepaid for next year) (Transferring insurance premium prepaid to its respective “Prepaid Insurance A/C”) In the above example, both the respective journal entries are posted to the ledger accounts and the balances are transferred and carried forward wherever necessary. 1.