Is Prepaid Insurance An Asset
What Is Prepaid Insurance
The fee which is paid in advance for an insurance contract is known as prepaid insurance. The amount of prepaid insurance will be used over time as per the contract made between parties.
Prepaid insurance is usually recorded in the balance sheet because the business holder or holders will always want to secure the business, and for that, they need for an insurance contract with the insurance provider. Normally owners pay the insurance fee in advance to make their business secure.
If an owner pays a fee late then the contract can be terminated which can be a risky condition for a business.
Is Prepaid Insurance An Asset
Prepaid insurance is an asset and recorded in the balance sheet as a current asset because normally insurance is made for a short period such as a year and if the insurance is for a long time then the portion of the insurance amount which is spent in a year is recorded as an expense in the income statement and deducted from the balance sheet and the remaining amount will be treated as a non-current asset.
Double Entry Of Prepaid Insurance
When prepaid insurance is purchased, it is treated as a current asset if the contract is for one year or if the contract is for the long term then except for the amount that is spent in the current year rest of the amount will be treated as a non-current asset.
When prepaid insurance is made
When the prepaid insurance is paid in advance the double entry will be:
- Debit Prepaid Insurance
- Credit Cash/ Bank
When prepaid insurance is Used
- Debit Insurance Expense
- Credit Prepaid Insurance
Example Of Prepaid Insurance
Suppose a business purchases prepaid insurance for general coverage and paid $1,000 for the next twelve months.
Initially, the transaction will be recorded as:
- Debit $1,000 In Prepaid Insurance Account
- Credit $1,000 In Cash Or Bank Account
After twelve months the transaction will be recorded as:
- Debit $1,000 In Insurance Expense Account
- And Credit $1,000 In Prepaid Insurance Account
Prepaid Insurance FAQs
Why is prepaid insurance an asset?
Prepaid insurance is normally consumed within a year because of that it is treated as a short-term asset.
Is prepaid insurance an expense or a liability?
Prepaid insurance is an asset when it is first purchased but when it is used over time then it is treated as an expense in the statement of profit and loss.
What type of account is prepaid insurance?
Prepaid insurance is a current account.
Where does prepaid insurance go in the trial balance?
It is recorded as a debit in the trial balance.
Does prepaid insurance go on the income statement?
Initially, it is recorded in the balance sheet but once it is used then it is recorded in the income statement as an expense.
What is the journal entry for prepaid insurance?
Prepaid insurance is debited and cash/bank will be credited.
What is the journal entry for prepaid expenses?
Insurance expenses will be debited and prepaid insurance will be credited.