Wilson Company paid $4,800 for a 4-month insurance premium in advance on November 1, with coverage beginning on that date. The balance in the prepaid insurance account before adjustment at the end of the year is $4,800 and no adjustments had been made previously. The adjusting entry required on December 31 is:

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The insurance premium is paid in advance, so the prepaid insurance account is debited for the full amount of the premium. As time passes, the insurance coverage expires and the prepaid insurance account is reduced. The adjusting entry at the end of the month is to debit insurance expense for the amount of the expired insurance coverage and credit prepaid insurance for the same amount. In this case, the insurance premium is for 4 months and the coverage began on November 1, so the expired insurance coverage at the end of December is for 2 months. The adjusting entry is therefore to debit insurance expense for $2,400 (2 months x $1,200 per month) and credit prepaid insurance for $2,400.

Wilson Company Paid $4,800 for a 4-Month Insurance Premium in Advance