Suppose that a business purchases a 6-month general liability insurance policy for $24,000 on January 1. To record this transaction, the company debits "Prepaid Insurance" for $24,000 and credits "Cash" for $24,000. As of January 31, the company has consumed one month of insurance. What adjusting entry is necessary at January 31?

Question

Quizplus · Accepted Answer

The adjusting entry necessary at January 31 is to recognize the amount of insurance that has been consumed or expired during the month, which is equal to 1/6 of the total policy amount, or $4,000. This means that $4,000 of the prepaid insurance account needs to be transferred to the insurance expense account as an expense for the month. Therefore, the correct adjusting entry is to debit "Insurance Expense" for $4,000 and credit "Prepaid Insurance" for $4,000.

Suppose That a Business Purchases a 6-Month General Liability Insurance