Final answer:
Companies debit Insurance Expense and credit Prepaid Insurance to reflect the cost of insurance that has expired during the period, aligning with the matching principle.
Step-by-step explanation:
At the financial statement date, companies debit Insurance Expense and credit Prepaid Insurance for the cost of insurance that has expired during the period. This accounting practice is in line with the matching principle, where expenses are matched with revenues in the period in which they are incurred. Prepaid Insurance is an asset account on the balance sheet, representing the cost of insurance that has not yet expired. As the insurance coverage is used over time, it becomes an expense. At each financial statement date, businesses must adjust their accounts to reflect the portion of prepaid insurance that has expired, which is then reported as Insurance Expense on the income statement, thereby reducing net income by the cost of expired insurance coverage. This process ensures that the financial statements accurately reflect the company's expenses and remaining prepaid assets.