prepaid insurance journal entry

The $50,000 balance in prepaid expense appears on the balance sheet for the month, while the $10,000 rent expense appears on the income statement. Companies use two sets of journal entries to record the insurance-related transactions, involving both prepaid insurance and expired insurance. When companies initially pay for the total insurance premium, a debit is entered to the asset account of prepaid insurance and a credit entered to the cash account for the cash spent. As the insurance expires over time, companies debit the expense account of expired insurance and credit prepaid insurance to reduce the balance in the asset account. At the end of the insurance term, the account of prepaid insurance should have a zero balance. Initial journal entries do not affect the company’s financial statements.

  • At the end of the year, you will have expensed the entire $24,000, and your prepaid rent account will have a $0 balance.
  • The date when the benefits have been received against it, then the entry should be passed to record it as actual expense in the books of accounts.
  • The offsetting credit reduces the expense to an amount equal to the amount consumed during the period.
  • 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.

If the prepayment covers a longer period, then classify the portion of the prepaid insurance that will not be charged to expense within one year as a long-term asset. Since this expense is spread over 12 months, through amortization, you would divide the total amount by 12 to calculate your monthly rent, i.e., $1,000. To represent this accurately, you would have to enter this amount as a rental expense every month in the income statement and reduce the rental prepaid expense by the same amount simultaneously. Prepaid expenses cannot be expensed as soon prepaid insurance journal entry as you pay for a service or goods because your business benefits from it over a period of time. And according to GAAP , when you record an expense, you must realize the benefit from the asset in the same accounting period. BlackLine Account Reconciliations, a full account reconciliation solution, has a prepaid amortization template to automate the process of accounting for prepaid expenses. It stores a schedule of payments for amortizable items and establishes a monthly schedule of the expenses that should be entered over the life of the prepaid items.

Continue the process until the prepaid expense account is $0

Prepaid insurance is the insurance premium that businesses pay during an accounting period that did not expire within that business period. In a journal entry involving only one debit and one credit, is it conceivable to decrease a liability and increase a revenue? In a journal entry involving only one debit and one credit, is it conceivable to increase an asset and decrease a liability?

A prepaid expense is an expense that is paid for in advance and usually in a lump sum. Items such as insurance and rent can be paid for with one payment that covers the cost of the expense for several months or a year. BlackLine and our ecosystem of software and cloud partners work together to transform our joint customers’ finance and accounting processes. Together, we provide innovative solutions that help F&A teams achieve shorter close cycles and better controls, enabling them to drive better decision-making across the company. These entries will also affect your financial statements, with your asset account steadily reduced while your Insurance Expense amount will increase. Prepaid expenses refer to expenses paid before the expense is incurred.

What is considered a prepaid expense?

Recall that prepaid expenses are considered an asset because they provide future economic benefits to the company. Prepaid expenses are assets that become expenses as they expire or get used up. For example, office supplies are considered an asset until they are used in the course of doing business, at which time they become an expense. At the end of each accounting period, adjusting entries are necessary to recognize the portion of prepaid expenses that have become actual expenses through use or the passage of time. Companies purchase insurance coverage by paying insurance premiums and record related transactions accordingly.

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  • 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 account.
  • Repeat the process each month until the policy is used and the asset account is empty.
  • Suppose the total payroll on that date is $10,000 ($3,000 relating to the prior year and another $7,000 for an additional seven work days in 20X9).