How Are Prepaid Expenses Recorded on the Income Statement?

In this case, it needs to prepaid insurance journal entry for prepaid insurance by properly making journal entries in order to avoid errors that could lead to misstatement on both balance sheet and income statement. Alternate Problem H Jupiter Publishing Company began operations on 2010 December 1.

The amount of interest therefore depends on the amount of the borrowing (“principal”), the interest rate (“rate”), and the length of the borrowing period (“time”). The total amount of interest on a loan is calculated as Principal X Rate X Time. Might relate to such events as client services that are based on hours worked.

Journal Entries for Prepaid Expenses

Instead, prepaid expenses are first recorded on the balance sheet; then, as the benefit of the prepaid expense is realized, or as the expense is incurred, it is recognized on the income statement. Prepaid expenses are assets that become expenses as they expire or get used up.

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Is insurance a credit or debit?

The credit part of the adjusting entry is the asset account, whose value is reduced by the amount used up. Any remaining balance in the asset account is what you still have left to use up into the future. At the end of each accounting period, a journal entry is posted for the expense incurred over that period, according to the schedule. This journal entry credits the prepaid asset account on the balance sheet, such as Prepaid Insurance, and debits an expense account on the income statement, such as Insurance Expense. Consider the previous example from the point of view of the customer who pays $1,800 for six months of insurance coverage. Initially, she records the transaction by increasing one asset account with a debit and by decreasing another asset account with a credit. After one month, she makes an adjusting entry to increase insurance expense for $300 and to decrease prepaid insurance for $300.

• Although Mr. John’s trial balance does not disclose it, there is a current asset of $3,200 on 31 December 2019.
• DateAccountNotesDebitCreditX/XX/XXXXPrepaid Expense1800Cash1800Each month, adjust the accounts by the amount of the policy you use.
• Here are the ledgers that relate to the purchase of supplies when the transaction above is posted.
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• A prepaid expense is listed on the balance sheet, and as its benefits are recognized, it will be expensed, and the related asset account will be decreased.
• Prepaid Insurance2,400Cash2,400What adjusting entry is necessary at December 31, the end of the accounting year?

The Supplies Expense amount on the income statement would have been too low ($0 instead of $100). Here are the Supplies and Supplies Expense ledgers AFTER the adjusting entry has been posted.