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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