is insurance expense an asset

As of November 30, none of the $2,400 has expired and the entire $2,400 will be reported as prepaid insurance. Journal entries that recognize expenses related to previously recorded prepaids are called adjusting entries. They do not record new business transactions but simply adjust previously recorded transactions. Adjusting entries for prepaid expenses are necessary to ensure that expenses are recognized in the period in which they are incurred. Instead, they provide value over time—generally over multiple accounting periods.

is insurance expense an asset

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. The prepaid amount will be reported on the balance sheet after inventory and could part of an item described as prepaid expenses. 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.

What is Insurance Expense?

When they aren’t used up or expired, these payments show up on an insurance company’s balance sheet. On December 31, an adjusting entry will show a debit insurance expense for $400—the amount that expired or one-sixth of $2,400—and will credit prepaid insurance for $400. This means that the debit balance in prepaid insurance on December 31 will be $2,000. This translates to five months of insurance that has not yet expired times $400 per month or five-sixths of the $2,400 insurance premium cost.

is insurance expense an asset

It should be noted that insurance coverage can also be bought to cover production. In this case, the insurance expense becomes a part of the overhead costs. Accordingly, it will be accounted for in the business inventory as horizontal analysis formula calculator well as listed under the cost of goods sold. Insurance expense is something you would typically see in the bookkeeping records of a business. We have briefly reviewed what insurance is all about, but about the expense part?

This event is also recorded by the bookkeeper, only now, the insurance policy is the company’s liability and recorded under the insurance payable account. The company would reduce this account by the amount it pays the insurance company, simultaneously crediting its cash account. Now, both the business and the insurance company have obligations before each other. When it comes to accounting for this expense, it is recorded along with other spendings and costs. Accordingly, insurance expense is an outflow of money for something a business has already used.

Definition of Insurance Expense

Thus, it is first recorded in the accounting books as prepaid insurance. Credit the corresponding account you used to make the payment, like a Cash or Checking account. Expenditures are recorded as prepaid expenses in order to more closely match their recognition as expenses with the periods in which they are actually consumed. This would mean that now the company will deduct this expense from its revenue and it will reduce its final profit. At the same time, its assets are also reduced because the resources were used to have insurance coverage just in case.

  1. On December 31, the company writes an adjusting entry to record the insurance expense that was used up (expired) and to reduce the amount that remains prepaid.
  2. A prepaid expense is an expenditure that a business or individual pays for before using it.
  3. This is accomplished with a debit of $1,000 to Insurance Expense and a credit of $1,000 to Prepaid Insurance.
  4. If you’re new to accounting, you may wonder how to record discounts allowed.
  5. The payment is entered on November 20 with a debit of $2,400 to prepaid insurance and a credit of $2,400 to cash.
  6. ABC Company will initially book the full $120,000 as a debit to prepaid insurance, an asset on the balance sheet, and a credit to cash.

DateAccountNotesDebitCreditX/XX/XXXXExpenseXPrepaid ExpenseXLet’s say you prepay six month’s worth of rent, which adds up to $6,000. When you prepay rent, you record the entire $6,000 as an asset on the balance sheet. The business has paid for the insurance policy for 1 year ahead on May 1st.

Elements of the Income Statement

For example, if a large Xerox machine is leased by a company for a period of twelve months, the company benefits from its use over the full time period. 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. Unlike conventional expenses, the business will receive something of value from the prepaid expense over the course of several accounting periods.

If the company issues monthly financial statements, its income statement will report Insurance Expense which is one-sixth of the six-month premium. The balance in the account Prepaid Insurance will be the amount that is still prepaid as of the date of the balance sheet. As mentioned above, the premiums or payment is recorded in one accounting period, but the contract isn’t in effect until a future period.

Accounting for Insurance Expense

It is primarily the protection of your financial interests in the event of an insured event. It is clear that insurance will not help to avoid accidents, natural disasters, illnesses, but thanks to it, you will be able to cover the losses. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. A bookkeeping expert will contact you during business hours to discuss your needs.

Because the expense expires as you use it, you can’t expense the entire value of the item immediately. Another item commonly found in the prepaid expenses account is prepaid rent. On December 31, the company writes an adjusting entry to record the insurance expense that was used up (expired) and to reduce the amount that remains prepaid.

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