In most cases, this is the correct entry to book, however, in certain transactions we are paying upfront for the right to use an asset or receive a service over a defined period of time. Hence, prepaid insurance journal entry does not affect the total assets because it increases one asset account and decreases another asset account at the same amount. A prepaid expense is classified as a type of asset account in the company’s financial records. Specifically, it falls under the category of current assets on the balance sheet. This journal entry is completed to establish your Prepaid Insurance asset account that represents the prepaid amount. Remember, to track prepaid expenses properly, they need to be recorded in your general ledger as a prepaid expense asset, with a portion of the prepaid asset accounted for each month as an expense.
Prepaid insurance enables businesses to pay for insurance on an upfront basis, rather than on an as-needed basis. This allows them to identify the exact amount of insurance they will need for a given period of time. As you use the prepaid item, decrease your Prepaid prepaid insurance journal entry Expense account and increase your actual Expense account. To do this, debit your Expense account and credit your Prepaid Expense account. The company recorded the December 1 payment with a debit of ₹7,000 for Prepaid Insurance and a credit of ₹6,000 for Cash.
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Once again I have entered an example into the free bookkeeping software called Manager. Here are some common types of insurance that are recommended for a business depending on the type of business they operate. On the other hand, liabilities, equity, and revenue are increased by credits and decreased by debits. Take note that the amount has not yet been incurred, thus it is proper to record it as an asset. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications.
- You can put the insurance check back onto the same expense account that the original repairs were coded to which will offset that expense.
- A company would pay ₹12,000 to cover 12 months of insurance, and the current asset it records at payment is ₹12,000 to reflect this prepaid amount.
- If you use cash-basis accounting, you only record transactions when money physically changes hands.
- To create your first journal entry for prepaid expenses, debit your Prepaid Expense account.
- Let’s say that Bill’s Retail Store pays its insurance premiums every six months.
Additionally, the policyholder should be prepared to answer any questions that the insurance company may have about the claim. Repeat the process each month until the rent is used and the asset account is empty. As each month passes, adjust the accounts by the amount of rent you use. Since the prepayment is for six months, divide the total cost by six ($9,000 / 6). The value of the asset is then replaced with an actual expense recorded on the income statement.
Insurance Journal Entry Questions
The company must continue to make appropriate journal entries to apportion the prepaid insurance expense according to the time period during which the expense will continue to accrue. This is usually done by the accounting department at the end of each financial year by using an adjusting journal entry. Journal entries for the acquisition of prepaid insurance typically involve debiting the current asset account and crediting the cash account.
