A company has an asset account,Prepaid Insurance,with a balance of $3,750 at the beginning of the month.The company used $980 of insurance during the month.Which of the following statements is true?

Question

Quizplus · Accepted Answer

When a company uses a prepaid asset, such as prepaid insurance, it is considered an expense and should be recorded as such. The account to be debited, in this case, would be Insurance Expense, and the account to be credited would be Prepaid Insurance, both for the amount of $980. This would decrease the balance of Prepaid Insurance to $2,770 ($3,750 - $980). Neither Retained Earnings nor Stockholders' Equity is affected by this transaction since it only involves a decrease in assets and an increase in expenses, which have no direct effect on equity accounts.

A Company Has an Asset Account,Prepaid Insurance,with a Balance of $3,750