Final answer:
Advance insurance premiums paid by a company are recorded as a prepaid expense, not a liability. Liabilities represent debts owed, whereas prepaid expenses represent future economic benefits, like receiving insurance coverage. Hence, the answer to whether paying insurance premiums in advance records as a liability is False.
Step-by-step explanation:
When a company pays insurance premiums in advance, this transaction is recorded as a prepaid expense, not a liability. The reason behind this is that the payment represents a future economic benefit that the company will receive; in this case, insurance coverage for a specified period. Liabilities, on the other hand, represent obligations or debts that the company owes to others, which is not the case with prepaid insurance premiums.
Insurance companies operate on the basis of collecting premiums and paying out claims, with additional costs like administrative expenses and potential profits or losses. Insurance premiums are the payments households or firms make to insurance companies, which pool these funds to cover the losses experienced by some of its members.
To correct the initial statement: When a company pays insurance premiums in advance, it records the payment as a prepaid expense, not a liability, because the insurance coverage is a service that will be provided in the future. Therefore, the correct answer to the student's question is False.