Since insurance premiums are usually paid prior to the period covered by the payment, it is common to debit Prepaid Insurance and to credit Cash for the amount paid. (Prepaid Insurance is a current asset and is reported on the balance sheet after inventory.)

As the prepaid amount expires, the balance in Prepaid Insurance is reduced by a credit to Prepaid Insurance and a debit to Insurance Expense. This is done with an adjusting entry at the end of each accounting period (e.g. monthly). One objective of the adjusting entry is to match the proper amount of insurance expense to the period indicated on the income statement. (The income statement should report the amount of insurance that has expired during the period indicated in the income statement’s heading.) Another objective is to report on the balance sheet the unexpired amount of insurance as the asset Prepaid Insurance.

If you can arrange for your insurance payments to be the amount applicable to each accounting period, you can simply debit Insurance Expense and credit Cash. For example, if the insurance premiums for one year amount to $12,000 and you can pay the insurance company $1,000 per month, then each monthly payment will be recorded with a debit to Insurance Expense and a credit to Cash. In this case $1,000 per month will be matched on the income statement and there will be no prepaid amount to be reported on the balance sheet.

Learn more about Adjusting Entries.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years. He is the creator and author of all the content found on AccountingCoach.com. You can read 1,500 testimonials praising his ability to explain accounting in a way that anybody can understand.

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