Question

On march 15, morgan corporation paid $1,000 to buy a one-year insurance policy that will expire exactly one year after the date of purchase. morgan’s accounting clerk tells his supervisor that this transaction will affect only the assets portion of the company’s balance sheet. is the clerk correct? why or why not?

Answer 1

Yes. It will only affect the asset portion of the company's balance sheet.

When the company buys the one-year insurance policy, the journal entries will be:

Debit Credit
Prepaid insurance 1,000
Cash 1,000

When the insurance expires after a year, the journal entries will be:
Insurance Expense 1,000
Prepaid Insurance 1,000

Note:
Prepaid Insurance and Cash are both found in the assets section of the balance sheet.
Insurance Expense is found in the Income statement of the company and not in the balance sheet.