In order to safeguard their assets, businesses pay insurance premiums upfront. The premium paid before the commencement of the insurance period is a prepaid expense. The accountant in you is wondering how to write this down as an asset and make an provisions later. This journal entry for a payment of this nature is referred to as prepaid insurance journal entry. Let’s look at what a prepaid insurance journal entry is. It is a journal entry reflecting insurance premium the business has paid in advance. Since you have yet to receive the benefit, you consider the amount paid as an asset. When the insurance period begins, you slowly transfer a portion of the amount from the asset account to the expense account.
So, in this article, we will clarify about the whole idea. The topics covered are prepaid insurance accounting journal entry, the adjusting journal entry for prepaid insurance, what to do for prepaid insurance journal entry adjustments, how do you pass entry in Tally. We can also see entries like prepaid health insurance journal entry and learn the expired portion of prepaid insurance.
What is Prepaid Insurance?
Prepaid insurance is the payment made in advance for future periods of insurance coverage. This can be monthly, quarterly or annually. And you’re treating this as a current asset until the coverage starts and time goes by. When a business pays for insurance in advance, prior to the policy beginning or before the close of the accounting period, the payment includes benefits for future periods. Hence, it does not expense the entire amount all at once. Instead, it records the payment as an asset on the balance sheet.
You expense some of the prepaid insurance each month or period once it passes.
Example:
- On January 01, you pay ₹24,000 for 1-year of insurance.
- On 1- Jan, record as Prepaid Insurance (asset) ₹24,000.
- At the end of January, charge ₹2,000 (₹24,000 ÷ 12).
This is in line with the matching principle in accounting. You align expenses with the time period they relate to. The same principle applies to other prepaid costs such as rent or subscriptions.
Recording Prepaid Insurance Journal Entry
The first step in the process is to book the advance insurance premium payment in your books. This is the prepaid insurance journal entry and considers the payment as a resource.
Initial Entry Format:
| Particulars | Debit ₹ | Credit₹ |
| Prepaid Insurance A/cTo Bank A/c/Cash A/c(Being pre-paid insurance premium) | ₹X | ₹X |
Prepaid Insurance (current asset) (debit) increase You say Bank because the money flows out.
Example:
Hence, you make a payment of ₹18,000 to the insurer on 1st March for a policy with tenure of 6 months.
Prepaid Insurance A/c Dr. ₹18,000
To Bank A/c ₹18,000
(The insurance premium paid for March – August)
Nothing like a simple prepaid insurance general journal entry.
As the benefit pertains to future periods, you will not impact the Profit and Loss account immediately.
Adjusting Journal Entry for Prepaid Insurance
At the end of each month or accounting period, you would need to make adjustments to your books. You need to allocate some of the amount paid in advance to the Insurance Expense account. This is the adjusting journal entry for prepaid insurance.
Why Adjust?
- You should make periodic expense with appropriate period
- You have to be to show a true asset balance
- You are subject to accrual accounting rules
Adjusting Entry Format:
| Particulars | Debit ₹ | Credit₹ |
| Insurance Expense A/cTo Prepaid Insurance A/c(Being adjustment for expired insurance) | ₹X | ₹X |
Debit Insurance Expense to record the increase in expense. You credit prepaid insurance to decrease the asset.
Example:
So continuing from the earlier case, for the 31st of March, you have to adjust for one month
Insurance Expense A/c Dr ₹3,000
To Prepaid Insurance A/c ₹3,000
(One month on insurance is expired)
Create this entry every month until 6 months.
Prepaid insurance journal entry adjustments is the process of doing this.
Prepaid Insurance Expired Journal Entry
When a portion of prepaid insurance expires, it becomes an expense for the business and must be recorded accordingly. This adjustment ensures accurate reporting of expenses and assets. The prepaid insurance expired journal entry needs to be posted each period when a portion expired.
Example:
- If we assume four months are passed till June 30th.
- Total insurance: ₹18,000Monthly premium: ₹3,000
- Four months expired: ₹12,000
- On June 30, your diary entry might read:
Income from Investment A/c Dr ₹12,000
To Prepaid Insurance A/c ₹12,000
Post this, only ₹6,000 will be left in the prepaid insurance account. You repeat this until the entire amount is transferred to the expense account.
Prepaid Health Insurance Journal Entry
Others pay low-cost, high-deductible health insurance up front for workers. You would make this a journal entry just like you would for any other prepaid insurance journal entries. This is the prepaid health insurance journal entry.
Example:
In January, you pay ₹60,000 for health insurance for the entire year.
Health Insurance Prepaid A/c Dr ₹60,000
To Bank A/c ₹60,000
You will adjust ₹5,000 every month in the following manner:
Health Insurance Expense A/c Dr ₹5,000
To Prepaid Health Insurance A/c ₹5,000
That way your expense sheet reflects the correct period.
Prepaid Insurance Journal Entry in Tally
Some simple steps will help you to pass the entry correctly with Tally. You post both first and adjusting entries using journal vouchers. Of the steps to be followed for recording the prepaid insurance journal entry in Tally are —
How to Enter in Tally:
- Go to Accounting Vouchers
- Press F7 for Journal
- For initial payment:
- Debit: Prepaid Insurance A/c
- Credit: Bank A/c
- For monthly adjustment:
- Debit: Insurance Expense A/c
- Credit: Prepaid Insurance A/c
- Add narration and save
Be sure to make the two ledgers,
- To further explain, we note the following: Prepaid Insurance under “Current Assets”
- Insurance Expense in “Indirect Expenses”
It then lets you know if you have unused insurance and if you have billed it.
Prepaid Insurance Journal Entry Example Table
Here is a month-by-month example for a 6-month prepaid insurance of ₹18,000 paid on March 1st.
| Date | Journal Entry | Amount (₹) |
| March 1 | Prepaid Insurance A/c Dr; To Bank A/c | 18,000 |
| March 31 | Insurance Expense A/c Dr; To Prepaid Insurance A/c | 3,000 |
| April 30 | Insurance Expense A/c Dr; To Prepaid Insurance A/c | 3,000 |
| May 31 | Insurance Expense A/c Dr; To Prepaid Insurance A/c | 3,000 |
| June 30 | Insurance Expense A/c Dr; To Prepaid Insurance A/c | 3,000 |
| July 31 | Insurance Expense A/c Dr; To Prepaid Insurance A/c | 3,000 |
| August 31 | Insurance Expense A/c Dr; To Prepaid Insurance A/c | 3,000 |
A total of ₹18,000 gets expensed over six months using prepaid insurance journal entry adjustments.
Relevance to ACCA Syllabus
When it comes to the ACCA syllabus, a prepaid insurance journal entry is addressed under the Financial Accounting (FA) and Financial Reporting (FR) papers. This assists students with comprehension on how to implement accrual accounting methods, asset type and expense matching–all of which are helpful in generating accurate financial statements.
Prepaid Insurance Journal Entry ACCA Questions
Q1: How is insurance premium paid in advance recorded?
A. As an expense in full
B. As a liability
C. Prepaid expense (asset)
D. As deferred income
Answer: C
Q2: What is the correct journal entry at the time of paying ₹12,000 for one-year insurance?
A. Dr. Insurance Expense A/c ₹12,000; Cr. To Bank A/c ₹12,000
B. Prepaid Insurance A/c Dr ₹12,000; To Bank A/c ₹12,000
C. Bank A/c Dr ₹12,000; To Prepaid Insurance A/c ₹12,000
D. Insurance Payable A/c Dr ₹12,000 To Bank A/c ₹12,000
Answer: B
Q3: For prepaid insurance, the adjusting entry at the end of each month is:
A. Debit for Prepaid Insurance; Credit for Insurance Expense
B. Debit Bank; Credit Prepaid Insurance
C. Insurance Expense Debit; Prepaid Insurance Credit
D. Debit Insurance Expense; Credit Cash
Answer: C
Q4: How do you present prepaid insurance in financial statements before it expires?
A. Current liability
B. Operating income
C. Current asset
D. Non-current asset
Answer: C
Q5: What accounting principle supports the allocation of the prepaid insurance expense over multiple periods?
A. Going concern
B. Matching principle
C. Prudence
D. Consistency
Answer: B
Relevance to US CMA Syllabus
Prepaid insurance journal entry is essential for accurately recording operating expenses, managing cash flow, and determining the correct amount of adjusting entries to make in the general ledger in CMA Part 1: Financial Planning, Performance and Analytics. It is directly related to the internal control system to the financial records.
Prepaid Insurance Journal Entry US CMA Questions
Q1: Which category on the Balance sheet do you put prepaid insurance?
A. Non-current asset
B. Intangible asset
C. Current asset
D. Liability
Answer: C
Q2: Show the journal entry for the expiration of prepaid insurance of ₹6,000 after a month?
A. Prepaid Insurance A/c Dr; To Insurance Expense A/c
B. Insurance Expense A/c Dr ₹500; To Prepaid Insurance A/c ₹500
C. Insurance Expense A/c Dr ₹6,000; To Bank A/c ₹6,000
D. Prepaid Insurance A/c Dr ₹6,000; To Bank A/c ₹6,000
Answer: B
Q3: What concept relates to adjusting prepaid insurance each month?
A. Time value of money
B. Matching concept
C. Materiality
D. Cash basis accounting
Answer: B
Q4: If you do not adjust prepaid insurance, what will be the impact?
A. It will understate insurance expense
B. Assets will be understated
C. Insurance expense will be understated
D. Revenue will be overstated
Answer: C
Q5: What accounting entry is made when prepaid insurance is completely utilized?
A. Transfer to capital
B. Charged to profit and loss
C. Added to revenue
D. Converted to cash
Answer: B
Relevance to US CPA Syllabus
Prepaid insurance journal entry is critical for period-end adjustments, financial accuracy, and ensuring compliance with the generally accepted accounting principles in the United States of America (US GAAP) in CPA FAR (Financial Accounting and Reporting). CPAs need to know how to correctly classify and adjust prepaid assets.
Prepaid Insurance Journal Entry US CPA Questions
Q1: Prepaid insurance is recorded as per GAAP as:
A. Revenue
B. Liability
C. Asset
D. Equity
Answer: C
Q2: A company pays ₹24,000 for a year-long policy. What is the expense entry for the month?
A. Insurance Expense A/c Dr ₹2,000; To Prepaid Insurance A/c ₹2,000
B. Insurance Expense A/c Dr ; To Bank A/c ₹24,000
C. Prepaid Insurance A/c Dr ₹2,000; To Bank A/c ₹2,000
D. No entry needed
Answer: A
Q3: If you fail to adjust prepaid insurance, it would mean:
A. Overstated expenses
B. Overstated income
C. Overstated assets
D. Understated liabilities
Answer: C
Q4: Prepaid insurance is presented under (there is a corresponding account for it on the other side of the balance sheet) in the GAAP compliant books in the US:
A. Income Statement
B. Notes to accounts
C. Balance Sheet
D. Statement of Cash Flows
Answer: C
Q5: “Prepaid Insurance” is what type of account?
A. Nominal
B. Contra-asset
C. Current asset
D. Deferred revenue
Answer: C
Relevance to CFA Syllabus
Prepaid insurance is one of the topics related to asset recognition, expense allocation, and adjusting entries for CFA Level I Financial Reporting. By doing so, analysts can better understand the level of financial health and performance of a company.
Prepaid Insurance Journal Entry CFA Questions
Q1: Do you know what effect prepaid insurance not being adjusted has on financial analysis?
A. Understates total assets
O. Causes current liabilities to be overstated
C. Overstates net income
D. Overstates expenses
Answer: C
Q2: Prepaid insurance is shown at the balance sheet.
A. Income Statement
B: Statement of Retained Earnings
C. Balance Sheet
D. Cash Flow Statement
Answer: C
Q3. What is the treatment of prepaid insurance in analysis?
A. Non-operating liability
B. Operating current asset
C. Financing asset
D. Deferred liability
Answer: B
Q4: Prepaid insurance must be when analyzing expenses over time:
A. Ignored in P&L
B. Allocated over the insurance period
C. Treated as revenue
D. Fully expensed immediately
Answer: B
Q5: By now, we know most companies are but can’t use it — so what now?
A. Record it as an expense
B. Record it as capital
C. Prepare entry as prepaid expense
D. Record it as income
Answer: C
