A company purchased a two-year insurance policy on September 1, debiting Prepaid Insurance for the full amount. If no adjusting entry is made at the end of the year, how does this affect the year-end financial statements?

Question

Quizplus · Accepted Answer

If no adjusting entry is made to account for the portion of the insurance policy that has expired during the year, the Prepaid Insurance account will continue to show the full amount of the policy as an asset on the balance sheet at the end of the year. This overstates the amount of assets, as a portion of the prepaid insurance has already been used up, and should be recognized as an expense.

A Company Purchased a Two-Year Insurance Policy on September 1