At the end of each month, an adjusting entry of $400 will be recorded to debit Insurance Expense and credit Prepaid Insurance. MicroTrain reports the service revenue in its income statement for 2010. The company reports the USD 3,000 balance in the Unearned Service Fees account as a liability in the balance sheet. In 2011, the company will likely earn the USD 3,000 and transfer it to a revenue account. Notice that the amount for which adjustment is made differs under two methods, but the final amounts are the same, i.e., an insurance expense of $450 and prepaid insurance of $1,350. Prepaid expenses are expenses that have been paid in advance for goods or services that will be received or consumed in the future.

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Here are the Equipment, Accumulated Depreciation, and Depreciation Expense account ledgers AFTER the adjusting entry above has been posted. Here are the Prepaid Taxes and Taxes Expense ledgers AFTER the adjusting entry has been posted. Here are the Prepaid Rent and Rent Expense ledgers AFTER the adjusting entry https://www.bookstime.com/articles/bookkeeping-and-payroll-services has been posted. Here are the Prepaid Insurance and Insurance Expense ledgers AFTER the adjusting entry has been posted. At the end of the year, there may be expenses whose benefits have been received but not paid for and expenses that may have been paid, but their benefit will appear in the next financial year.

• By the end of the month some of the insurance expired, so you reduced the value of this asset to reflect what you actually had on hand at the end of the month ($1,100).
• Prepaying for expenses by a company is recognised on the balance sheet as a prepaid asset.
• The remaining $1,100 in the Prepaid Insurance account will appear on the balance sheet.
• Here are the Prepaid Rent and Rent Expense ledgers AFTER the adjusting entry has been posted.
• If we talk about prepaid expenses in a journal entry, prepaid expenses are services paid in advance of being received.
• The company recorded the December 1 payment with a debit of ₹7,000 for Prepaid Insurance and a credit of ₹6,000 for Cash.
• This helps ensure that companies are accurately accounting for their assets while also staying up-to-date with any upcoming liabilities.

Insurance is a great example of a prepaid expense because it is usually paid in advance. A company would pay ₹12,000 to cover 12 months of insurance, and the current asset it records at payment is ₹12,000 to reflect this prepaid amount. The company prepaid insurance journal entry adjustments would record an expense of ₹1,000 each month and draw the prepaid assets by the same amount. Prepaid insurance is the portion of an insurance premium that has been paid in advance and has not expired as of the date of a company’s balance sheet.

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The value of the asset is then replaced with an actual expense recorded on the income statement. Book Value is what a fixed asset is currently worth, calculated by subtracting an asset’s Accumulated Depreciation balance from its cost. Here is the Taxes Expense ledger where transaction above is posted. Here is the Rent Expense ledger where transaction above is posted. Here is the Insurance Expense ledger where transaction above is posted. Here is the Supplies Expense ledger where transaction above is posted.

• You prepaid for a one-year business license during the month and initially recorded it as an asset because it would last for more than one month.
• You accrue a prepaid expense when you pay for something that you will receive in the near future.
• Any remaining balance in the Prepaid Taxes account is what you have left to use in the future; it continues to be an asset since it is still available.
• On the date it pays the rent, the company debits the prepayment to the Prepaid Rent account (an asset
  account).

The $100 balance in the Supplies Expense account will appear on the income statement at the end of the month. The remaining $900 in the Supplies account will appear on the balance sheet. This amount is still an asset to the company since it has not been used yet.

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The remaining $1,100 in the Prepaid Insurance account will appear on the balance sheet. Let’s say that Bill’s Retail Store pays its insurance premiums every six months. The policy is renewed after six months, and Bill then pays ₹700 for a seven-month extension. Bill is purchasing seven months of insurance when he makes his premium payment, which means that he pays for the benefits before he uses them. Supplies on hand Almost every business uses supplies in its operations.

The adjusting entry ensures that the amount of taxes expired appears as a business expense on the income statement, not as an asset on the balance sheet. The adjusting entry ensures that the amount of rent expired appears as a business expense on the income statement, not as an asset on the balance sheet. The adjusting entry ensures that the amount of insurance expired appears as a business expense on the income statement, not as an asset on the balance sheet. Prepaid insurance can be paid monthly, quarterly, or yearly depending on the insurance plan and policies as well as the company’s preference.

A simultaneous entry is also recorded, which reduces the company’s cash (or payments account) by the same amount. Prepaid expenses are generally considered a current asset on the balance sheet unless they are not incurred for more than 12 months, and this is very rare. When the prepaid expense is initially paid, it is recorded as a debit to the prepaid expense account and a credit to cash.

Prepaid expenses refer to expenses that a business pays in advance before they are actually incurred. In accounting, you might want to record a prepaid expense as a prepaid asset on the balance sheet until it’s used or consumed. At the end of the month 1/12 of the prepaid rent will be used up, and you must account for what has expired. After one month, $1,000 of the prepaid amount has expired, and you have only 11 months of prepaid rent left. In addition, on your income statement you will show that you did not use ANY rent to run the business during the month, when in fact you used $1,000 worth. At the end of the month 1/12 of the prepaid insurance will be used up, and you must account for what has expired.

You prepaid for a one-year business license during the month and initially recorded it as an asset because it would last for more than one month. By the end of the month some of the prepaid taxes expired, so you reduced the value of thisasset to reflect what you actually had on hand at the end of the month ($1,100). To transfer what expired, Taxes Expense was debited for the amount used and Prepaid Taxes was credited to reduce the asset by the same amount. Any remaining balance in the Prepaid Taxes account is what you have left to use in the future; it continues to be an asset since it is still available. You prepaid a one-year rent policy during the month and initially recorded it as an asset because it would last for more than one month. By the end of the month some of the prepaid rent expired, so you reduced the value of this asset to reflect what you actually had on hand at the end of the month ($11,000).