Each month, the business’s accounting department would make an adjusting journal entry of $1,000, representing the amount of one month’s premium payment in the general ledger. It would be entered as a credit in the asset account and as a debit to the insurance expense account. After this first expense, your balance sheet will show that there is $1,100 left in your prepaid insurance account. Eventually, there will be zero dollars left in the prepaid insurance account because the policy term is over.

Similarly, the expense will reach the total of the prepaid amount at the end of that same period. Prepaid insurance is also considered an asset because of its redeemable value. Any remaining prepaid portion of the premium could be redeemed or refunded to the business if the business cancels the policy before the period covered by those premiums has expired. Companies come to BlackLine because their traditional manual accounting processes are not sustainable.

Where does prepaid insurance go on a balance sheet?

We’ve outlined the procedure for reporting prepaid expenses below in a little more detail, along with a few examples. BlackLine is an SAP platinum partner and a part of your SAP financial mission control center. Our solutions complement SAP software as part of an end-to-end offering for Finance and Accounting. BlackLine solutions address the traditional manual processes that are performed by accountants outside the ERP, often in spreadsheets. Our solutions complement SAP software as part of an end-to-end offering for Finance & Accounting. It’s time to embrace modern accounting technology to save time, reduce risk, and create capacity to focus your time on what matters most.

The T account illustrates how the Different Types of Revenue and Profits for Startup Accounting asset has been used, as well as how the insurance expense account has been charged over time. This provides an accurate record of the company’s transaction and is used for financial reporting purposes. Regardless of whether it’s insurance, rent, utilities, or any other expense that’s paid in advance, it should be recorded in the appropriate prepaid asset account. The bookkeeper would create an initial journal entry that debits the lump-sum amount to the asset account for prepaid insurance and a credit of the same amount from the asset account for cash.

Prepaid Expenses

You must pay prepaid expenses upfront before you receive any type of benefit. For example, you might buy a one-year magazine subscription and receive one magazine per month for 12 months. The law change allows customers to irrevocably assign an existing life insurance policy to a funeral home or funeral director to fund an irrevocable prepaid burial contract. This irrevocable assignment of a life insurance policy is exempt and considered an allowable transfer.

• Underpayment, on the other hand, may lead to the policy’s cancellation, which can expose the company to high risks if any of the unforeseen events occur.
• Prepaid expense amortization is the method of accounting for the consumption of a prepaid expense over time.
• Since our founding in 2001, BlackLine has become a leading provider of cloud software that automates and controls critical accounting processes.
• As such, an adjusting entry is needed to transfer the correct portion of the prepaid insurance account balance to the insurance expense account.

The payment is entered on November 20 with adebitof $2,400 to https://personal-accounting.org/accounting-advice-for-startups/ and a credit of $2,400 to cash. As of November 30, none of the $2,400 has expired and the entire $2,400 will be reported as prepaid insurance. When the full amount is received by the insurer, accounting will treat the payment as an asset.

Prepaid Expenses Example

A company spending six or seven figures a year on insurance costs will want to count that cash as an asset until it’s actually used. In theory, they could cancel the insurance early and receive a huge cash refund. Most businesses won’t have to worry about the accounting side of prepaid insurance. That’s because the vast majority of businesses in the United States use the “cash basis” accounting method. This simply means that the company records revenue as the money is received and expenses as it pays them. If I pay for insurance, for example, I simply log the expense as any other bill when I pay it.

• Overpayment may affect the company’s liquidity or financial leverage, especially if the excess cost of insurance was financed through borrowed funds.
• Prepaid expenses represent expenditures that have not yet been recorded by a company as an expense, but have been paid for in advance.
• Make the most of your team’s time by automating accounts receivables tasks and using data to drive priority, action, and results.
• Preparing adjusting entries for prepaid insurance involves several detailed steps.
• Pay-per-mile car insurance policies are designed to benefit customers who maintain low annual mileage, such as people who work from home, are stay-at-home parents, or are retirees.
• Like all financial products, prepaid insurance has both advantages and disadvantages to consider.