Understanding Prepaid Insurance Adjusting Entries: A Comprehensive Guide

The proceeding amortization schedule illustrates the appropriate amortization of the short-term and long-term portions of the prepaid subscription. FastTrack company buys one-year insurance for its delivery truck and pays $1200 for the same on December 1, 2017. Now that the company has prepaid for services to be used, it is classified as an asset. The “Service Supplies Expense” is an expense account while “Service Supplies” is an asset. After making the entry, the balance of the unused Service https://x.com/BooksTimeInc Supplies is now at $600 ($1,500 debit and $900 credit). Depreciation and amortisation refer to the process of assigning the cost of an asset, such as a building or equipment, over the economic life of that asset.

Income Statement Under Absorption Costing? (All You Need to Know)

In this journal entry, the company records the prepaid insurance as an asset since it is an advance payment which the company has not incurred the expense yet. This means the company should record the insurance expense at the period end adjusting entry when a portion of prepaid insurance has expired. The adjusting entry for prepaid expense will depend upon the initial journal entry, whether it was recorded using the asset method or expense method.

Expense Method

This requires proper calculation and amortization of prepaid expenditures such as insurance, software subscriptions, and leases. On December 31, an adjusting entry will show a debit insurance expense for $400—the amount that expired or one-sixth of $2,400—and will credit prepaid insurance prepaid insurance journal entry adjustments for $400. This means that the debit balance in prepaid insurance on December 31 will be $2,000.

• Regardless of the method chosen, the goal of the adjusting entries is to ensure that the incurred or expired portion is treated as an expense, while the unused part remains in assets.
• Although being a simple concept, it is important for an organization to correctly account for and recognize prepaid expenses on its balance sheet.
• The premium covers twelve months from 1 September 2019 to 31 August 2020, i.e., four months of 2019 and eight months of 2020.
• It is also important not to confuse a prepaid expense with an accrued expense.
• They are an advance payment for the business and therefore treated as an asset.

It is a part of the insurance premium paid in advance

This is because the insurance has been paid for in advance and has not yet expired as of the date of the balance sheet. It is considered a current asset because it will be used within a year of payment. It is important to show prepaid expenses journal entry in the financial statements to avoid understatement of earnings.

Also, Each month, you would make an adjusting entry to expense $15,000 (1/12 of the prepaid amount) to the income statement through a credit to prepaid insurance and a debit to insurance expense. Finally, In the 12th month, the final $15,000 will be fully expensed and the prepaid account will be zero. This is done through an adjusting entry, which is usually done at the end of each accounting period. The prepaid insurance expense account under the current assets in the balance sheet will still show the amount of https://www.bookstime.com/ $16,000.

• Journalize the prepaid items in the books of Unreal Corp. using the below trial balance and additional information provided along with it.
• Of the total six-month insurance amounting to $6,000 ($1,000 per month), the insurance for 4 months has already expired.
• On November 30, none of the $2,400 has expired, and the entire amount is reported on the balance sheet as Prepaid Insurance.
• Create a prepaid expenses journal entry in your books at the time of purchase, before using the good or service.
• Prepaid assets are nonmonetary assets whose benefits affect more than one accounting period.

Therefore, the unexpired portion of this insurance will be shown as an asset on the company’s balance sheet. Prepaid insurance is considered an asset because it benefits future accounting periods. It relieves businesses of the monthly premium expense, reducing their costs while conferring the benefit of having coverage. Any remaining prepaid portion of the premium could be refunded to the business if the policy is cancelled before the period covered by those premiums expires. Prepaid insurance is treated as an asset on a company’s balance sheet and is gradually charged to expense.