BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Insurance expense (+E) 2, 000 Prepaid insurance expense (-A) 2, 000
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Insurance expense (+E) 3, 000 Prepaid insurance expense (-A) 3, 000
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Prepaid insurance expense (+A) 3, 000 Insurance expense (-E) 3, 000
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Prepaid insurance expense (+A) 9, 000 Insurance expense (-E) 9, 000
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Detailed explanation-1: -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.
Detailed explanation-2: -When there is a payment that represents a prepayment of an expense, a prepaid account, such as Prepaid Insurance, is debited and the cash account is credited. This records the prepayment as an asset on the company’s balance sheet.
Detailed explanation-3: -Adjustments for prepaid expenses As you use the prepaid item, decrease your Prepaid Expense account and increase your actual Expense account. To do this, debit your Expense account and credit your Prepaid Expense account. This creates a prepaid expense adjusting entry.
Detailed explanation-4: -At the end of any accounting period, the amount of the insurance premiums that remain prepaid should be reported in the current asset account, Prepaid Insurance. The prepaid amount will be reported on the balance sheet after inventory and could part of an item described as prepaid expenses.