Is prepaid insurance an asset?

Since companies gradually use up these assets over time, they record depreciation expense on them. An adjusting journal entry occurs at the end of a reporting period to record any unrecognized income or expenses for the period. Explain why Adjusting Entries are required at the end of each accounting period, and provide an example of a required journal entry for either the consumption of supplies or insurance. Does the prepaid insurance account normally require an adjusting entry? Learn the definition of adjusting entries in accounting, and find examples. Explore the various types of adjusting journal entries, and examine how to do them.

After 12 full prepaid insurance journal entrys, at the end of May in the year after the business license was initially purchased, all of the prepaid taxes will have expired. If the company would like to continue to do business in the upcoming year, it will have to prepay again. The $100 balance in the Taxes Expense account will appear on the income statement at the end of the month. The remaining $1,100 in the Prepaid Taxes account will appear on the balance sheet. This amount is still an asset to the company since it has not expired yet. After 12 full months, at the end of May in the year after the rent was initially purchased, all of the prepaid rent will have expired.

Company

Companies record expired insurance periodically based on the intersection of their accounting periods and the time structure of the insurance. At the end of the insurance term, the total insurance expires and companies would have fully recorded the total prepaid insurance as expenses over multiple periods. Liability / revenue adjustments come from companies receiving advance payments for items such as training services, delivery services, tickets, and magazine or newspaper subscriptions. Receiving assets before they are earned creates a liability called unearned revenue. The firm debits such receipts to the asset account Cash and credits a liability account.

All 12 months from Jan’20 to Dec’20 will be charged in each period against the prepaid expense account to reduce the prepaid account to zero by end of the year. Common prepaid expenses include rent and professional service payments made to accountants and attorneys, as well as service contracts. It includes insurance, rent, subscription, and utility bill payments. Prepaid expenses offer tax benefits as well as help you hedge against inflation. Prepaid expenses also help make sure that you do not miss services/goods such as insurance and supplies when needed. In this method, the entry of the assets is recorded in advance.

How long can prepaid expenses be reported as an asset?

Therefore, correct financial statements can be prepared directly from the adjusted trial balance. The next chapter provides a detailed look at the adjusted trial balance. When an asset is expected to be consumed or used in the company’s regular business operations within the accounting year, it is recorded as a current asset. Current assets, sometimes also referred to as current accounts, are shown on the company’s balance sheet.

Companies purchase insurance coverage by paying insurance premiums and record related transactions accordingly. Depending on the length of the insurance purchased each time, companies may record the insurance for uses over multiple accounting periods. In other words, companies may have to journalize insurance expense periodically as the insurance expires over time, instead of expensing the total insurance purchase at once in a single period. Accumulated depreciation records the amount of the asset’s cost that has been expensed since it was put into use. Accumulated depreciation has a normal credit balance that is subtracted from a Plant and Equipment asset account on the balance sheet. Therefore, accumulated depreciation is a contra-asset account. Contra-asset accounts are asset accounts with a normal credit balance.

How to prepare your adjusting entries

The adjusting entry for supplies updates the Supplies and Supplies Expense balances to reflect what you really have at the end of the month. The adjusting entry TRANSFERS $100 from Supplies to Supplies Expense. A certain revenue or expense has incurred in the given month, but no transaction has been recorded to book that amount.

This streamlines the remaining steps in the process of accounting for prepaid items. Accrued expenses are expenses that have been incurred but not yet paid or recorded.

Illustration of Prepaid Rent

Fixed assets are first recorded as assets that later are gradually “expensed off,” or claimed as a business expense, over time. You had purchased supplies during the month and initially recorded them as an asset because they would last for more than one month. By the end of the month you used up some of these supplies, so you reduced the value of this asset to reflect what you actually had on hand at the end of the month ($900). What was used up ($100) became an expense, or cost of doing business, for the month. To transfer what was used, Supplies Expense was debited for the amount used and Supplies was credited to reduce the asset by the same amount. Any remaining balance in the Supplies account is what you have left to use in the future; it continues to be an asset since it is still available.

• Because the amount is paid in advance benefit of which is not yet received and the same is to be received in the future date.
• Tax and accounting rules and information change regularly.
• Here is the Supplies Expense ledger where transaction above is posted.
• Note – it is not necessary to record each individual operating expense as a separate liability – a credit to either accounts payable or accrued liability is acceptable.
• Accrued rent is the opposite of prepaid rent discussed earlier.