How Do I Adjust Entry for Prepaid Insurance?

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In accounting, assets are items owned by the business. Fuel and office supplies are two examples of assets. As assets are used up, they need to be replaced. The cost of replacing assets reduces income and is referred to as an expense. For example, replacing office supplies is referred to as office supplies expense. Some assets, such as an insurance policy, are intangible. As insurance is paid for in advance, this asset is referred to as prepaid insurance. For a six-month policy, each month that passes by uses up one-sixth of the policy.

  • Understand accounting terms such as debit and credit. An accounting journal has two columns, a debit column on the left, and a credit column on the right. Make entries in the debit column when recording an increase in an asset account or to record an expense. Make entries in the credit column to record a decrease in an asset account.

  • Enter the cost of the policy. Enter the date in the date column, then write "Prepaid Insurance" in the account column and enter the total cost of the policy in the debit column. Move to the next row down, write "cash" in the account column and enter the cost of the policy in the credit column. Make this entry to reflect the purchase of an asset (insurance policy) and the decrease in the asset cash.

  • Calculate the monthly cost of the policy. Divide the cost of the policy by the number of months the policy is effective. For example, if the policy cost $600 and is a six-month policy, divide $600 by six months to get the monthly cost of $100.

  • Enter the monthly cost of the policy after one month has passed. Write the date in the date column, "Insurance Expense" in the account column and the amount of the monthly cost in the debit column. Move down to the next row, write "Prepaid Insurance" in the account column and the monthly cost in the credit column. Make this entry to reflect the fact that one month of the policy has elapsed. Repeat each month.

Tips & Warnings

  • If you are unsure of your calculations for the monthly expense amount, you can double-check it by multiplying the monthly expense by the number of months the policy is in effect. If the answer is the same as the cost of the policy, your calculations are correct.
  • Recalculate the monthly expense when the policy is renewed in case of any changes in price.
  • Verify that the amount entered as a debit to "Insurance Expense" is equal to the amount credited to the "Prepaid Insurance" account, or the books will be out of balance.
  • Enter exact amounts; do not round numbers.

References

  • Photo Credit Hemera Technologies/Photos.com/Getty Images Jupiterimages/Comstock/Getty Images Jupiterimages/Photos.com/Getty Images
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