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Prepaid Expenses Examples, Accounting for a Prepaid Expense

prepaid insurance credit or debit

Companies come to BlackLine because their traditional manual accounting processes are not sustainable. We help them move to modern accounting by unifying their data and processes, automating repetitive work, and driving accountability through visibility. Timely, reliable data is critical for decision-making and reporting throughout the M&A lifecycle. Without accurate information, organizations risk making poor business decisions, paying too much, issuing inaccurate financial statements, and other errors.

Additionally, many travel cards offer practical perks such as trip insurance to cover your losses in case of illness or other issues. Prepaid expenses refers to payments made in advance and part of the amount will become an expense in a future accounting period. A common example is paying a 6-month insurance premium in December that provides coverage from December 1 through May 31.

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If you pay a six-month premium for a car insurance policy, the coverage will protect your automobile from the effective date until it’s time to renew the policy. Whether or not it is worth getting a travel credit card depends on your spending habits and travel goals. Travel credit cards offer some of the highest welcome bonuses and ongoing earn rates on everyday spending. If your goal is to earn lots of points for travel (plus a few extra perks), then a travel credit card makes sense. The business’s records would show four months of insurance policy as a current, prepaid asset.

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So when a company has paid the insurance premium in advance for the next period, that extra payment is recorded as prepaid insurance on the Asset side of the Balance sheet. So every company treats it as an asset, and when the period comes, the appropriate amount is shown as an expense under the Insurance expense. 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. A prepaid expense is the payment of an expense that the benefit will expand over more than one accounting period.

The initial journal entry for prepaid rent is a debit to prepaid rent and a credit to cash. On December 31, the company writes an adjusting entry to record the insurance expense that the 10 best peo companies was used up (expired) and to reduce the amount that remains prepaid. This is accomplished with a debit of $1,000 to Insurance Expense and a credit of $1,000 to Prepaid Insurance.

What Is Prepaid Insurance?

The payment is entered on November 20 with a debit of $2,400 to prepaid insurance and a credit of $2,400 to cash. As of November 30, none of the $2,400 has expired and the entire $2,400 will be reported as prepaid insurance. Let’s assume that a company is started on December 1 and arranges for business insurance to begin on December 1. On December 1 the company pays the insurance company $12,000 for the insurance premiums covering one year. The company will record the payment with a debit of $12,000 to Prepaid Insurance and a credit of $12,000 to Cash.

The prepaid amount will be reported on the balance sheet after inventory and could part of an item described as prepaid expenses. Another situation where you might create a credit balance in your prepaid insurance account is if a company simply fails to pay their insurance premium in a timely manner. The monthly adjusting entry causes the prepaid insurance to become a credit balance. So, essentially, even if you haven’t made payment, but you still have the automatically credit the prepaid insurance that’s a way to create your credit balance on a prepaid insurance asset account.

A current asset is a financial resource that can be easily liquidated, or converted to cash, in a year or less. In contrast, a non-current or fixed asset, like real estate, cannot be easily liquidated in a year or less. Prepaid insurance refers to premiums for insurance that are paid in advance. A premium is a regular, recurring payment made to a provider for the benefit of having insurance coverage. In the business, the company usually needs to make an advance payment for the insurance that it has purchases. In this case, it is important for the company to record the payment as prepaid insurance.

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As mentioned above, the premiums or payment is recorded in one accounting period, but the contract isn’t in effect until a future period. A prepaid expense is carried on an insurance company’s balance sheet as a current asset until it is consumed. That’s because most prepaid assets are consumed within a few months of being recorded. When the insurance premiums are paid in advance, they are referred to as prepaid. At the end of any accounting period, the amount of the insurance premiums that remain prepaid should be reported in the current asset account, Prepaid Insurance.

  • You must pay prepaid expenses upfront before you receive any type of benefit.
  • Generally, Prepaid Insurance is a current asset account that has a debit balance.
  • Prior to issuing the December 31 financial statements, the company must remove the $120 credit balance in Prepaid Insurance by debiting Prepaid Insurance and crediting Insurance Expense.
  • As of November 30, none of the $2,400 has expired and the entire $2,400 will be reported as prepaid insurance.
  • It would be entered into the general ledger as a debit of $12,000 to the asset account and a credit for the same amount to the cash account.

The prepaid insurance account must report the true amount that is prepaid but yet not expired as of the day of the balance sheet. A business buys one year of general liability insurance in advance, for $12,000. The initial entry is a debit of $12,000 to the prepaid insurance (asset) account, and a credit of $12,000 to the cash (asset) account. 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. 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.

Definition of Prepaid Insurance

Company A signs a one-year lease on a warehouse for $10,000 a month. The landlord requires that Company A pays the annual amount ($120,000) upfront at the beginning of the year. Enrollment may be required for select American Express benefits and offers.

prepaid insurance credit or debit

While prepayment and monthly billing are standard ways to pay an insurance premium, some auto insurance companies offer pay-per-mile policies. Here, only the amount for 3 months is prepaid and it is recorded on the asset side of the balance sheet. Chase’s First Banking debit card for kids and teens is designed to soothe all parent fears when it comes to giving children easy access to money.

*Deposit insurance requirements:

Our solutions complement SAP software as part of an end-to-end offering for Finance & Accounting. BlackLine solutions address the traditional manual processes that are performed by accountants outside the ERP, often in spreadsheets. Retailers are recalibrating their strategies and investing in innovative business models to drive transformation quickly, profitably, and at scale. Save time, reduce risk, and create capacity to support your organization’s strategic objectives.

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Prepaid insurance is insurance paid in advance and that has not yet expired on the date of the balance sheet. When an expense is paid in advance, the company will not have to pay it when it arises. The company’s Balance Sheet will reflect the expense as an asset as long as the correct period doesn’t arrive. As the correct period approaches, it will be moved from the asset side and reflected under the expense.

The payment of the insurance expense is similar to money in the bank—as that money is used up, it is withdrawn from the account in each month or accounting period. The adjusting journal entry for a prepaid expense, however, does affect both a company’s income statement and balance sheet. The adjusting entry on January 31 would result in an expense of $10,000 (rent expense) and a decrease in assets of $10,000 (prepaid rent).

prepaid insurance credit or debit

Each month, the business’s accounting department would make an adjusting journal entry of $1,000, representing the amount of one month’s premium payment in the general ledger. It would be entered as a credit in the asset account and as a debit to the insurance expense account. A prepaid expense arises when a company pays cash advance to cover some expenses that the benefit will expand over more than one accounting period. Although it is called an “expense”, accrual-based accounting should record a prepaid expense or prepayment initially as an asset. At the end of the period, prepaid expense accounts usually require adjustments to reflect the “consumed” or “used-up” portion as expenses in the current period.