Question

Let's continue with the example where Bikram Yoga Natick prepays $2,400 for one year of insurance on January 1, 2013.

Since the benefits provided by the Prepaid Insurance will cover an entire year, Bikram Yoga Natick needs to recognize the expense for insurance coverage evenly throughout the year. To do this, Bikram Yoga Natick will record a journal entry at the end of the month to record a month's worth of insurance coverage used.

How?

Answer 1

Bikram Yoga Natick should make a monthly adjusting journal entry to record $200 as an insurance expense, debiting the Insurance Expense account and crediting the Prepaid Insurance account.

Step-by-step explanation:

The student is asking about how Bikram Yoga Natick would record the journal entry for the monthly insurance expense when they have pre-paid for a year's insurance coverage. The pre-payment of $2,400 for the entire year covers twelve months, which means the monthly insurance expense is $2,400 divided by 12, which equals $200 per month. On the last day of each month, Bikram Yoga Natick should recognize this expense to match their financial records with the period in which the services are used.

To recognize the monthly expense, Bikram Yoga Natick would make a journal entry debiting the Insurance Expense account and crediting the Prepaid Insurance account by the amount of $200. This entry reduces the Prepaid Insurance balance and recognizes the expense in the income statement for that month. Adjusting entries like this one are crucial for adhering to the accrual basis of accounting and the matching principle, which states that expenses should be recognized in the same period as the revenues they help generate.