In July,a company pays three years' insurance in advance.The December 31 adjusting entry is

Question

Quizplus · Accepted Answer

When a company pays insurance in advance, it initially records the payment as a prepaid expense, which is an asset. As time passes and the insurance coverage is used, the company needs to recognize the expense. By the end of December, part of the prepaid insurance has been used, so the company needs to adjust its accounts to reflect the expense incurred. The correct adjusting entry is to debit Insurance Expense (to recognize the expense) and credit Prepaid Insurance (to reduce the asset as it is being used).

In July,a Company Pays Three Years' Insurance in Advance