Due to the fact insurance premiums tend to be compensated before the period covered from the payment, it can be widespread to debit Prepaid Insurance and to credit cash for the amount paid. Prepaid Insurance is usually a existing asset and is reported around the balance sheet soon after inventory.)
Because the prepaid amount expires, the balance in Prepaid Insurance is lowered by a credit to Prepaid Insurance and also a debit to Insurance Expense. This can be performed with an adjusting entry in the finish of every single accounting period (e.g. month-to-month). One particular objective with the adjusting entry will be to match the right volume of insurance expense for the period indicated around the income statement. (The income statement need to report the quantity of insurance which has expired through the period indicated inside the income heading.) A different objective will be to report around the balance sheet the unexpired volume of insurance because the asset Prepaid Insurance.
When you can arrange for the insurance payments to become the quantity applicable to every single accounting period, you may only debit Insurance Expense and credit cash. One example is, in the event the insurance premiums for one particular year amounting to $12,000 and also you can spend the insurance corporation $1,000 monthly, then every single month-to-month payment might be recorded using a debit to Insurance Expense and also a credit to cash. Within this case $1,000 monthly might be matched around the revenue statement and there might be no prepaid amount to become reported around the balance sheet.
Elmer Tamayo is the author of myaccountinginfo.net who took-up his degree of "BS in Accountancy" major in accounting. A Web designer and blogger, His passion is Reading books, searching new tech update on the world wide web. Read More...
