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Insurance premium is generally paid by the company on behalf of its employees. When an asset is expected to be consumed or used in the company’s regular business operations within the accounting year, it is recorded as a current asset. Current assets, sometimes also referred to as current accounts, are shown on the company’s balance sheet.
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How is prepaid insurance reflected on financial statements?
On the contrary, all accrued expenses have to be reported as a form of current liability on the balance sheet. This is because accrued expenses are costs that the business incurs but has not made the payment for prepaid insurance journal entry at the end of a financial period. With that, do not allow the term “expenses” in “prepaid expenses” to deceive you. Despite its name, prepaid expenses are not recorded as expenses upon their initial payment.
In other words, it is the cost of insurance that is paid ahead of the coverage period. Prepaid insurance refers to premiums for insurance that are paid in advance. A premium is a regular, recurring payment made to a provider for the benefit of having insurance coverage. Working capital, cash flows, collections opportunities, and other critical metrics depend on timely and accurate processes. Ensure services revenue has been accurately recorded and related payments are reflected properly on the balance sheet.
Accounting Steps to Record Prepaid Insurance
If financial statements are only issued quarterly, the balance in Prepaid expenses must reflect the prepaid amount (not expired) at each quarter’s end. Any charges that a corporation expects to incur in the future are prepaid expenses. Prepaid expenses are prevalent because there are numerous instances where payment is required before goods or services are delivered.
This would achieve the matching principle goal of recognizing the expense over the life of the subscription. It would be entered into the general ledger as a debit of $12,000 to the asset account and a credit for the same amount to the cash account. The amount of time a prepaid expense is reported as an asset should correspond with how long the payment will provide a benefit to the organization, usually up to 12 months. The payment of expense in advance increases one asset (prepaid or unexpired expense) and decreases another asset (cash). You must pay prepaid expenses upfront before you receive any type of benefit. For example, you might buy a one-year magazine subscription and receive one magazine per month for 12 months.
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https://www.bookstime.com/ is considered a prepaid asset because it benefits future accounting periods. It relieves them of the monthly premium expense, and in doing so, reduces their costs, while at the same time still conferring the benefit of having coverage for the business. A prepaid expense is an expenditure that a business or individual pays for before using it.
Let’s look at some examples of prepaid expenses and see how and why they are recorded. Several purchases that you make in small businesses can be considered prepaid expenses. Prepaid expenses are when you pay in advance for an expense you will use over multiple accounting periods. Prepaid expenses are created when the expense is paid, and the actual revenue doesn’t take place at once.
Typically an entity will pay its insurance premiums at the beginning of the policy period, recognizing a prepaid asset subsequently amortized over the term of the policy. When we have the right to receive services or assets over an agreed-upon term and we prepaid for the right, the prepaid asset is not derecognized all at one time as with other prepaid expenses. Rather, under GAAP accounting, it should be gradually and systematically amortized over the term of the agreement. Accounting for prepaid expenditures and ensuring they are properly recognized on your financial statements is a critical piece of financial reporting.