Prepaid Insurance Debit or Credit

Prepaid insurance is a debit balance because it is an asset to u who holds the insurance policy. These are both asset accounts and do not increase or decrease a companys balance sheet.

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Considering this the company will need to adjust its prepaid insurance balance of 24000 to make it 8000 and the difference 16000 will be recorded as insurance expense for the year.

. To record the initial journal entry prepaid rent. First we will ascertain the reason why prepaid insurance is debited considering the modern rules along with the help of an example. But it is a liability to the insurance coy which means is a credit balance to d insurance coy because the cash received for the insurance policy have to be provided back to u in future in case of any risk u suffered.

Another situation where you might create a credit balance in your prepaid insurance account. As you can see the remaining balance on the Prepaid Insurance account is 696 debit because we first reduced it by 116 for four months 1164464 and then recorded the last credit entry further reducing it by 232 for a total of 696. Modern rules of accounting.

If you keep a ledger enter the prepaid insurance payment as both. Recall that prepaid expenses are considered an asset because they provide future economic benefits to the. Debit Credit Prepaid Insurance 14400 Supplies 3600 Equipment 18750 Accumulated Depreciation-Equipment 8300 Notes Payable 25000 Unearned Rent Revenue 10800 Rent Revenue 58000 Interest Expense Salaries and Wages Expense 14000 An analysis of the accounts shows the following.

Prepaid insurance is an asset to the entity. If the first of the 33333 payments is debited to the insurance expense before the prepaid insurance gets debited for the new quarter then the monthly adjusting entry would cause the balance in the prepaid insurance account to become a credit balance. To make you understand this question it is important to familiarize you with both the Golden rules and Modern rules of accounting.

On the other hand the Insurance Expense. Prior to issuing the December 31 financial statements the company must remove the 120. In this case if the company does not make the insurance expense journal entry above in the month-end adjusting entry the September expenses will be understated by 100 while the total assets will be overstated by 100 as at September 30 2020.

For example refer to the first example of prepaid rent. Its an asset that you own. Insurance Expense Debit 250 Prepaid Insurance Credit 250 The Insurance Expense would now be shown in the income statement for January and Balance 16.

Answer 1 of 2. Prepaid insurance is an expenditure. As each month goes by its expenses.

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. Heres how the accounts usually go. The company will record the payment with a debit of 12000 to prepaid insurance and a credit of 12000 to cash.

Prepaid Expense FundsNet. An entity initially records this expenditure as a prepaid expense an asset and then charges it to expense over the usage period. May 12 2022 Steven Bragg.

This is explained in the following T-account format. By making this journal entry the company will be able to record the insurance expense which has been incurred already and the part of prepaid insurance which has now already expired. Use one month of insurance.

The initial entry is a debit of 12000 to the prepaid insurance asset account and a credit of 12000 to the cash asset account. After all debits and credits are posted to the general ledger the Prepaid Insurance account will have a debit balance of 550 reflecting the cost of insurance policy that has not expired. The debit entry to insurance expense will result in adding the expenses whereas credit to the prepaid expense account will result in decreasing the current asset.

This alternative method of recording and classifying prepaid insurance is also legitimate and a lot of organizations choose this methodology since it is more convenient. Prepaid insurance is a future expense which you must pay upfront and receive its benefits over time. The ending balance either debit or credit would be classified as Prepaid or Accrued Insurance at the end of the period.

However once you make the premium payment the policys coverage becomes an asset which diminishes over time during the coverage period. The adjusting entry for prepaid insurance and insurance expense at the end of January is illustrated as follows. Paid cash in the form of a check card etc for 12 months of liability insurance in the amount of 1200.

The recurring monthly adjusting entries are not changed. Debit prepaid insurance and credit cash. The initial journal entry for prepaid rent is a debit to prepaid rent and a credit to cash.

At December 31 the balance in Prepaid Insurance will be a credit balance of 120 consisting of the debit of 2400 on January 1 the 12 monthly credits of 200 each and the 120 credit on July 1. An example of a prepaid expense is insurance which is frequently paid in advance for multiple future periods.

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