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  • How to record prepaid insurance Example

How to record prepaid insurance Example

  • October 28, 2021

prepaid insurance in balance sheet

No insurance company would sell insurance that covers a past event, so insurance expenses must be prepaid by businesses. Your next step would be to record the insurance expense for the next 12 months. You may be able to set up a recurring journal entry in your accounting software that will complete this automatically.

prepaid insurance in balance sheet

A small company has an insurance contract under which the total premium of $48,000 must be paid in advance for 12 months of coverage under a general liability insurance policy. In this example, the journal entry initial expense would be recorded as a debit to Prepaid Expenses and a credit to Cash. 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. Prepaid insurance is the portion of an insurance premium that has been paid in advance and has not expired as of the date of a company’s balance sheet. This unexpired cost is reported in the current asset account Prepaid Insurance.

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On the other hand, prepaid expenses imply that a company is liable to receive a service (or goods) against which they have already made the payment. Prepaid Expenses make the organization liable to receive a certain good or service. As the prepaid insurance expires throughout the passage of time, the company needs to transfer the prepaid insurance that has expired in the period to the insurance expense. When the insurance coverage comes into effect, it is moved from an asset and charged to the expense side of the company’s balance sheet.

In each month of the 12-month policy, the company would recognize an expense of $1,000 and draw down the prepaid asset by this same amount. Record your monthly expense month-by-month on your statement of cash flows. After 12 months the expense for prepaid insurance is fully accounted and your current asset balance for prepayments is at zero. Regardless of whether it’s insurance, rent, utilities, or any other expense that’s paid in advance, it should be recorded in the appropriate prepaid asset account. When the full amount is received by the insurer, accounting will treat the payment as an asset. An entry will then be created on the books to move this amount from current assets to the expense side.

Understanding Prepaid Expenses in the Balance Sheet

Then you would enter a debit of $1,200 to the prepaid insurance asset account, increasing its value. 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. Prepaid insurance is considered a business asset, and is listed as an asset account on the left side of the balance sheet. The payment of the insurance expense is similar to money in the bank, and the money will be withdrawn from the account as the insurance is “used up” each month or each accounting period.

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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. The prepaid amount will be reported on the balance sheet after inventory and could part of an item described as prepaid expenses. Things change if a business is using the “accrual basis” accounting method. These companies, usually larger corporations, will need to count prepaid expenses (like insurance) as an asset until it’s used up. If the delivery company in our example is using the accrual basis accounting method, then it’ll treat the prepaid insurance that hasn’t been used as an asset on its balance sheet until that amount is used up.

Prepaid Insurance Journal Entry

Thus, the amount charged to expense in an accounting period is only the amount of the prepaid insurance asset ratably assigned to that period. The term prepaid insurance refers to payments that are made by individuals and businesses to their insurers in advance for insurance services or coverage. Premiums are normally paid a full year in advance, but in some cases, they may cover more than 12 months.

  • It provides an automated solution for the creation, review, approval, and posting of journal entries.
  • Record your monthly expense month-by-month on your statement of cash flows.
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We help them move to modern accounting by unifying their data and processes, automating repetitive work, and driving accountability through visibility. Since our founding in 2001, BlackLine has become a leading provider of cloud software that automates and controls critical accounting processes. Whether you’re new to F&A or an experienced professional, sometimes you need a refresher on common finance and accounting terms and their definitions. BlackLine’s glossary provides descriptions for industry words and phrases, answers to frequently asked questions, and links to additional resources. While the responsibility to maintain compliance stretches across the organization, F&A has a critical role in ensuring compliance with financial rules and regulations.

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