Prepaid Expenses: Definition, Journal Entry, and Examples

prepaid insurance journal entry

Prepaid expenses could potentially come with tax advantages, but businesses must abide by the rules controlling tax deductions. Prepaid insurance is recorded in the general ledger as a prepaid asset under current assets. A current asset is a financial resource that can be easily liquidated, or converted to cash, in a year or less.

Where does prepaid insurance go in accounting?

Prepaid Insurance is the insurance premium paid by a company in an accounting period that didn't expire in the same accounting period. Therefore, the unexpired portion of this insurance will be shown as an asset on the company's balance sheet.

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Prepaid insurance journal entry

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prepaid insurance journal entry

This allocation is represented as a prepayment in a current account on the balance sheet of the company. BlackLine and our ecosystem of software and cloud partners work together to transform our joint customers’ finance and accounting processes. Together, we provide innovative solutions that help F&A teams achieve shorter close cycles and better controls, enabling them to drive better decision-making across the company.

Effect of  on Financial Statements

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Prepaid expense is first recorded as an asset and later debited as an expense. Hence, it can be recorded by using the asset method and expense method of accounting. On December 31, 2018, Company Y Ltd paid the salaries for January 2019, amounting to $ 10,000 in advance to the employees of the company. Analyze the treatment of the amount paid as an advance salary by the company to its employees and pass the necessary journal entries recording the payment and the adjusting entries. Prepaid expenses are the current asset of business then it will post to the asset side of Balance sheet it will deduct from the Main expenses head and post it to then P/L a/c.

Prepaid insurance explained

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  • To do this, debit your Expense account and credit your Prepaid Expense account.
  • Prepaid expenses are originally listed as assets, but as time passes, their value is eventually expensed onto the income statement.
  • Prepaid expenses represent expenditures that have not yet been recorded by a company as an expense, but have been paid for in advance.
  • For example, repaid rent is debited and cash is credited in the first journal entry for prepaid rent.

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