Question

The balance in the prepaid insurance account before adjustment at the end of the year is $6,400, which represents the insurance premiums for four months. The premiums were paid on November 1. The adjusting entry required on December 31 is:

Answer 1

Insurance Expense $6,400 (debit)

Prepaid Insurance $6,400 (credit)

Step-by-step explanation:

The Prepaid Insurance Account is an Asset Account. This is because it represents economic resources controlled by the firm as a result of past events (payment of insurance in advance) from which economic benefits are expected to flow into the business (insurance services).

As the Insurance is utilized, the Asset account decreases whilst the Expense Account Insurance Expense increases. The following journal entry shows how this happens.

Insurance Expense $6,400 (debit)

Prepaid Insurance $6,400 (credit)