A current asset which indicates the cost of the insurance contract (premiums) that have been paid in advance. It represents the amount that has been paid but has not yet expired as of the balance sheet date. A related account is Insurance Expense, which appears on the income statement.
A prepaid expense is a type of asset on the balance sheet that results from a business making advanced payments for goods or services to be received in the future. Prepaid expenses are initially recorded as assets, but their value is expensed over time onto the income statement.
Prepaid insurance is usually charged to expense on a straight-line basis over the term of the related insurance contract. When the asset is charged to expense, the journal entry is to debit the insurance expense account and credit the prepaid insurance account.
A prepaid expense is an expenditure paid for in one accounting period, but for which the underlying asset will not be consumed until a future period. When the asset is eventually consumed, it is charged to expense.
Insurance expense is the total cost that a company incurs in order to acquire an insurance contract, as well as additional payments known as premiums. The cost of insurance is recorded as an expense in the period in which it has been used.
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 The payment of the insurance expense is similar to money in the bank, and the money will be withdrawn from the account as the insurance is "used up" each month or each accounting period.
Another example of a deferred expense is a $12,000 insurance premium paid by a company on December 27 for insurance protection during the upcoming January 1 through June 30. On December 27, the $12,000 is deferred to the balance sheet account Prepaid Insurance, which is a current asset account.
Prepaid insurance is usually considered a current asset, as it becomes converted to cash or used within a fairly short time.
Purchase of Equipment or Furniture.
This very large deduction from your account will not show on your Income Statement as the furniture is an asset, not an expense. It is something tangible that is owned by the business, will be useful for more than a year, and will still have value at the end of the year.
Generally, Prepaid Insurance is a current asset account that has a debit balance. The debit balance indicates the amount that remains prepaid as of the date of the balance sheet. As time passes, the debit balance decreases as adjusting entries credit the account Prepaid Insurance and debit Insurance Expense.
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.
Definition of Prepaid Expenses
Generally, the amount of prepaid expenses that will be used up within one year are reported on a company's balance sheet as a current asset. As the amount expires, the current asset is reduced and the amount of the reduction is reported as an expense on the income statement.
Insurance is not for the investor in you but the individual and family man in you. Insurance protects your dependents and your assets (non-financial) from uncertainty.
Common examples of deferred expenditures include:
Rent on office space. Startup costs. Advertising fees. Advance payment of insurance coverage. An intangible asset cost that is deferred due to amortisation.
Prepaid expenses—which represent advance payments made by a company for goods and services to be received in the future—are considered current assets.
The most common examples of Prepaid expenses include Rent; Equipment paid for before use, Salaries, Taxes, utility bills, Interest expenses, etc.
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.
The prepaid expense is listed within the current assets section of the balance sheet until full consumption (i.e. the realization of benefits by the customer).
Depreciation is used on an income statement for almost every business. It is listed as an expense, and so should be used whenever an item is calculated for year-end tax purposes or to determine the validity of the item for liquidation purposes.
Interest expense is a non-operating expense shown on the income statement. It represents interest payable on any borrowings—bonds, loans, convertible debt or lines of credit. It is essentially calculated as the interest rate times the outstanding principal amount of the debt.