What is Prepaid Insurance?
Prepaid insurance is an expense for insurance cover which has been paid in advance. A prepayment is sometimes referred to as a deferred expense.
For example, a business has an annual car insurance of 6,000 and pays yearly in advance on the first day of each year. On the 1 January it pays the next years car insurance of 6,000 to cover the 12 months of January to December. It has a prepaid car insurance expense of 6,000.
Prepaid Insurance Debit or Credit?
The journal entry for the prepayment of insurance would involve a credit to cash, as cash is paid out, and a debit to the prepaid insurance account. Prepaid insurance like any prepayment is an asset of the business and is included in the balance sheet.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.