Data Ltd uses accrual accounting and its financial year ends on 30 June.Expenses paid in advance are treated as assets.On 1 May 2016,Data Ltd pays $480 for a one-year fire insurance policy that expires on 30 April 2017.
-What is the journal entry made by Data Ltd on 1 May 2016?

Question

Quizplus · Accepted Answer

When Data Ltd pays for fire insurance policy on 1 May 2016, it should record the transaction as an asset because the expense is paid in advance. Therefore, Data Ltd should debit Prepaid insurance for $480 (the cost of the insurance policy) and credit Cash for $480 (the amount paid). Thus, the correct journal entry would be:

Dr Prepaid insurance $480 
Cr Cash $480

Data Ltd Uses Accrual Accounting and Its Financial Year Ends