Prepaid Insurance Tired of Lumpy Expenses?

Companies purchase insurance coverage by paying insurance premiums and record related transactions accordingly. Depending on the length of the insurance purchased each time, companies may record the insurance for uses over multiple accounting periods. In other words, companies may have to journalize insurance expense periodically as the insurance expires https://quickbooks-payroll.org/ over time, instead of expensing the total insurance purchase at once in a single period. A legalretainer is often required before a lawyer or firm will begin representation. When a company pays a retainer, it is recorded as a prepaid expense on the balance sheet. It’s not expensed immediately because the company has not yet benefited from the services.

In January, the company records a journal entry to recognize 1/12 of the value of the insurance policy. The journal entry debits an insurance expense account and credits prepaid expenses for $1,500. At the end of January, the prepaid expense account balance is $16,500 on the balance sheet.

Prepaid expense vs. Prepaid insurance

You may be able to set up a recurring journal entry in your accounting software that will complete this automatically. If not, you’ll prepaid insurance journal entry need to create an amortization schedule to help you determine how much you need to pay each month and for how many months.

The adjusting journal entry is done each month, and at the end of the year, when the lease agreement has no future economic benefits, the prepaid rent balance would be 0. Expenses AccruedAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period.

Prepaid Rent

This account is an asset account, and assets are increased by debits. Credit the corresponding account you used to make the payment, like a Cash or Checking account. Crediting the account decreases your Cash or Checking account. These are both asset accounts and do not increase or decrease a company’s balance sheet.

• Two-thirds of the work related to $15,000 of cash received in advance was performed this period.
• You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
• Create a memorized journal entry to allocate one month or quarter of the expense.
• At the end of the insurance term, the account of prepaid insurance should have a zero balance.
• This is particularly important if the time frame is less than 12 months.

The company pays $24,000 in cash upfront for a 12-month insurance policy for the warehouse. As the benefits of the expenses are recognized, the related asset account is decreased and expensed. XYZ company needs to pay its employee liability insurance for the fiscal year ending December 31, 2018, which amounted to $10,000. The company has paid $10,000 of the insurance premium for the entire year at the beginning of the first quarter.