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On January 1, 2023, the balance in the prepaid insurance account was $2,500. On December 31, 2023, after the 2023 adjusting entries were made, the balance of the prepaid insurance account was $1,200. During 2023, cash payments for insurance premiums amounted to $5,000, which was debited to the prepaid insurance account. Prepare the adjusting entry, which must have been made at December 31, 2023

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Final answer:

The adjusting entry for prepaid insurance would be a debit to insurance expense for $6,300 and a credit to prepaid insurance for $6,300, reflecting the insurance cost for the year.

Step-by-step explanation:

The student's question involves the preparation of an adjusting entry for prepaid insurance at year-end. The beginning balance was $2,500 on January 1, 2023. Throughout the year, the company made cash payments amounting to $5,000, bringing the total amount in the prepaid insurance account to $7,500 before adjustments. The ending balance, after adjustments, was $1,200 on December 31, 2023. To find the insurance expense for the year, we calculate the difference between the total in the account before adjustment and the ending balance: $7,500 - $1,200 = $6,300. This amount represents the insurance cost for the year, so the adjusting entry on December 31, 2023, would be a debit to insurance expense for $6,300 and a credit to prepaid insurance for $6,300.

The entry properly allocates the insurance costs to the appropriate period and ensures the prepaid insurance balance reflects the future benefit remaining at year-end. This is a standard procedure in the accounting cycle to match expenses with the periods in which they are incurred, adhering to the matching principle of accounting.

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