Prepaid Insurance

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<p style=”margin-bottom:0in;margin-bottom:.0001pt; line-height:200%”><b>&nbsp;</b></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt; text-indent:-.25in;line-height:200%”><b>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On January 1 the Prepaid Insurance account had a balance of $6,000 that represented 6 months&rsquo; worth of advance payment. It is now the end of March and there have been no adjustments to the account balance. Determine the amount of expense to record at the end of March.</b></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt; line-height:200%”><b>Introduction</b></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt; line-height:200%”>Payments made in advance in finance and accounting are referred to as prepayments. For example, some of the ordinary prepaid expenses include rents as well as insurance. At the initial point of advances, the amount is recognized as a current asset to the company, and therefore it is recorded on the balance sheet. However, expenses are incurred at the point where they are utilized, consumed as well as at their expiry period. Prepaid insurance for six months is not recognized in the company income statement as the entire prepaid amount. Instead, as the month&rsquo;s insurance becomes due, the balance sheet amount reduces by the amount of monthly payment while expenses are recognized in insurance expense in the income statement. Therefore, a prepaid insurance of $6,000 for six months in January, and with no adjustments on the account balance up to end of March will result in $3,000 total amount of expense.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt; line-height:200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Besides, on January 1 the insurance prepayments amounted to $ 6,000 for six months coverage. For instance, the amount paid in January is acknowledged as a prepaid asset and is recorded on the balance sheet.&nbsp; Also, expenses are realized at the end of each month, and therefore, they are calculated as a sixth (1/6th) of the whole amount resulting to $1,000 per month. Furthermore, the amount of expense increases per month while the amount prepaid decreases are monthly implying that the value on balance sheet reduces monthly. However, the question clearly shows that there have not been any adjustments in the balance account up to the end of March which indicates that the expenses incurred for the three months have amounted to $3,000. Therefore, the amount of expense to be recorded at the end of March is $3,000.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt; line-height:200%”><b>Conclusion</b></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt; line-height:200%”>In conclusion, insurance prepayments mostly are usually incurred in portions proportional to the period to be covered. However, at the point of inception of the payment, the amount is posted in the balance sheet as an asset and the value keeps on decreasing on given procedure such as monthly. On the other hand, expense amount increases over the period of utilizing the payments. For instance, the question involves a prepayment with a coverage period of six months, and therefore, the amount of expense increased monthly with a value of $1,000. Similarly, the amount of payment is supposed to be regularly recorded, implying that the value of expenditures increases over the period. However, the amount to be adjusted after 3 (between the prepayment date (January 1) and the time of recording (March 31)) is equals to $ 1000 per month hence $ 3000 for the three months.</p>

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