Start networking and exchanging professional insights

Register now or log in to join your professional community.

Follow

NetSolution paid premium of $2400 for insurance policy covering 2 years. which of the following best describes this entry?

1. Debit: Prepaid Insurance. Credit: Cash

2. Debit: Insurance. Credit: Cash

3. Debit: Prepaid Insurance. Credit:Cash:

(New-para) Paid premium on two years policy.

user-image
Question added by Mehboob Ali Laghari , Social Mobilization Team Incharge , TRDP-European Union
Date Posted: 2015/08/11
Ahmed Abdi Mahad
by Ahmed Abdi Mahad , Director of Internal Auditing Directorate , Jigjiga University

Since the information from your question indicates that the insurance premium is paid for two years, you can record the initial entry for this transaction either as an asset or as an expense by using the accrual accounting method. If the transaction is recorded as an asset then the entry will be Dr. prepaid insurance and Cr. to cash accounts. Then at the end of the accounting period the expired portion will be adjusted by debiting insurance expense and crediting prepaid insurance. No reversing entry is needed.2. if the payment is initially recorded as an expense, the entry will be Dr. Insurance expense and credit cash accounts. At the end o the accounting period, the unexpired portion will be adjusted by debiting prepaid insurance and crediting the same amount to insurance expense. Then, on the first day of the second year a reversing entry which is the exact reverse of the adjusting entry will be needed. The revering entry will be Dr. prepaid insurance and cr. insurance expense accounts. The closing entry under both options is similar. but, the adjusting entry under the two options is different. This means under the first option when the entry is initially recorded as an asset, the amount to be adjusted will be the expired portion where as under the second option when the initial entry was recorded as an expense, the unexpired portion will be the amount to be adjusted. Before I come to the point in answering the question, i thing there is a typing error in your question because choice #1 and choice #3 are similar. So, the answer for your question is Dr. prepaid insurance .......2400 Cr. cash .....................................2400

Feroz Bandukra
by Feroz Bandukra , Finance Controller , Avenir Technologies FZE

The payment is covering2 years of insurance cost, therefore as per accrual basis it will be amortize over the period of2 years. Thus the correct entry will be option1,

Prepaid Insurance: Dr.

    Cash/Bank: Cr. 

Imdad Hussain Rajput
by Imdad Hussain Rajput , Assistant Sales Manager , Forego

Option no1..............................

Sayed Rubab Sayed
by Sayed Rubab Sayed , Finance Officer , The Next

I think description is important especially in the entry when you have to adjust the entries when the prepaid turns into expenses.

My answer is option-3

Deleted user
by Deleted user

Debit: Prepaid Insurance  Credit: Cash or Bank ......................................................................................

Michael Lagunday
by Michael Lagunday , Accountant , Dubai Camel Racing Club

My answer is1. Debit: Prepaid Insurance. Credit: Cash

Recording an expense that would benefit for long period of time is recorded as prepaid. This is an example of defferal. Eventually, these account is decreased though amortization over a period of time where it is expected to benefit the entity. 

Though initially, it could be recorded as Option 2. Debit: Insurance. Credit: Cash. and needs to be adjusted at the year of reporting period for its remaining portion. The entry at the end of reporting period would be debit Prepaid Insurance and Credit Insurance for the unamortized amount.

Wasim khan wazir
by Wasim khan wazir , Finance Specialist , Mott Macdonald

1 is correct option.......................................,

Shahbaz Hayder
by Shahbaz Hayder , Group Head of Finance , Sharif Group of Companies

I and3 are the same. so both are correct.

Option,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,3

Gyasuddin Ahamad Ansari
by Gyasuddin Ahamad Ansari , Accountant , Shiv Shakti Dall Mill Pvt.Ltd.

1 and3 is the right answer

wael mahmoud
by wael mahmoud , Procurement Executive , Ajman finance department

Prepaid Insurance: debit.

    Cash/Bank: Credit.

More Questions Like This