Question

On December 1, your company paid its insurance agent $2,400 for the annual insurance premium covering the twelve-month period beginning on December 1. The $2,400 payment was recorded on December 1 with a debit to the current asset Prepaid Insurance and a credit to the current asset Cash. Your company prepares monthly financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that will be written by the company.

What is the name of the account that will be debited?

Answer 1

The account that will be debited for the monthly adjusting entry of the insurance premium is the Insurance Expense account, which reflects the portion of the premium that has been used up during the month.

Step-by-step explanation:

The adjusting entry that will be written by the company for the monthly financial statements requires recognizing the portion of the insurance premium that has been 'used up' or expired during the month. This portion represents an expense. Consequently, the account that will be debited is the Insurance Expense account. For a monthly adjustment, this would typically be one-twelfth of the annual premium, since the premium covers a twelve-month period. Therefore, the adjusting entry on December 31 would look like this:

• Debit Insurance Expense: $200
• Credit Prepaid Insurance: $200

This reflects that $200 of the prepaid insurance has expired and is now recognized as an expense for the month.