What type of account is prepaid insurance on the balance sheet? 2022
Certain expenses, such as taxes and insurance, are paid in one lump sum during a specific accounting period. Earnings on these payments extend over a single accounting period, so it would not be accurate to charge the payment account in full at that time. These types of payments are processed using prepaid expense accounts.
Hint
- Prepaid insurance represents insurance that you purchase in advance. It is considered an asset of the business and listed as a current asset on the left side of the balance sheet
What is prepaid insurance?
Whenever your business buys insurance, you will pay your premiums up front for a specific period of coverage. For example, you might pay your premium for one year throughout January 1, 2019, or you may pay your premium for the six months from January 1 to June 30. And with consumer insurance, your prepayment runs out. The term “prepaid” refers to the portion of the premium that has not been used up at the balance sheet date.
Prepaid Insurance and Equity Accounts
Prepaid insurance is considered a business asset and listed as an asset account on the left side of the balance sheet. Payments for insurance premiums are similar to money in a bank, and as the insurance “runs out” each month or accounting period, the money is withdrawn from the account. Prepaid insurance is often considered a liquid asset because it will be converted into cash or used within a fairly short period. Other prepayments, such as prepaid rent, work in the same way.
Enter fee payment
If your business insurance premiums are due in February, your accounting period is the same as the calendar year, and monthly financial statements are settled, you need to account for the premium payment when writing your checks. For example, if the premium is $1,200 per year, you can reduce the value of the account by putting a check of $1,200 as a credit to a cash account in your journal. You’ll then debit the prepaid insured equity account by $1,200, increasing its value.
Accounting uses prepaid expenses
Every month, you need to move the used portion of your insurance benefits to an expense account. At the end of the month, before closing the book for the month, please double-enter the journal once. If the premium is $1,200 per year, you’ll enter a $100 credit into the prepaid insured equity account, reducing its value. You will then enter a debit to the insurance expense account, increasing the value of the expense. This reflects the insured amount for one month of depletion of the asset and correctly credits the gain and loss to the income statement.
Other accrued and deferred charges
Insurance is not the only expense that must be considered over multiple reporting periods. Any wages earned in one month but paid in the following month must be calculated in a similar manner to be charged in the month in which wages are paid. Property taxes are usually paid every six months and require the same treatment. Businesses can collect upfront payments on sales of undelivered products, and these sales must be entered as deferred revenue.