Final answer:
The company recognizes a monthly insurance expense of $400 from the $4,800 policy. This is done by dividing the total cost by the 12 months the policy covers, according to the expense recognition principle.
Step-by-step explanation:
The company's insurance policy, which was purchased for $4,800 and covers a twelve-month period starting from January 1st, represents a form of pre-paid expense. This is an accounting term that refers to payments made for goods or services to be received in the future. To reflect the actual insurance expense each month, the company needs to use an accounting principle called expense recognition or matching principle.
In this case, the cost of the insurance policy is spread evenly over the 12 months it covers. Therefore, each month, the company would recognize an insurance expense of $400 ($4,800 divided by 12 months). This amount is what would be recorded on the company's income statement monthly, with the remaining balance carried on the balance sheet as prepaid insurance.
Over the year, as the company consumes the insurance coverage, the prepaid insurance account is reduced each month by the amount of the expense recognized, until it is fully expensed and the prepaid account reaches zero at the end of the coverage period.