Analysis of Prepaid Insurance Adjustment in Accounting Essay

This essay delves into the accounting treatment of prepaid insurance, a current asset representing insurance premiums paid in advance. It explains the adjustment process, focusing on the balance sheet and income statement implications. The essay highlights how the prepaid insurance balance is reduced as the insurance period expires, and the corresponding increase in insurance expense. Using a scenario with a prepaid insurance balance of 6000, the essay details the adjusting journal entry, illustrating the debit to insurance expense and the credit to prepaid insurance. It emphasizes that prepaid expenses are payments made for future consumption and are adjusted at the end of the accounting period. The essay references relevant accounting literature and online resources to support its analysis, providing a comprehensive understanding of prepaid insurance adjustments. The conclusion summarizes the importance of recognizing prepaid expenses as assets until consumed and their subsequent impact on financial statements.

ACCOUNTING ESSAY

TABLE OF CONTENTS
ADJUSTMENT RELATED TO PREPAID INSURANCE............................................................3
INTRODUCTION...........................................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

ADJUSTMENT RELATED TO PREPAID INSURANCE
INTRODUCTION
Prepaid insurance can be refereed as current asset which reflects the insurance's cost
premium which has been already paid as and advance. The amount which has been already paid
but not even expired as of date on the balance sheet. In the same series, the related account is of
Insurance expense which has been highlighted in the Income statement and it is reported in
insurance amount expense within the period which has been represented in heading of the profit
and loss account.
In the present scenario the balance of prepaid insurance is 6000. As of 1st January, there
was advance payment of six months in this account. Now on 31st March there are major changes
to the account of prepaid insurance (Warren and Jones, 2018). The expenses which are prepaid,
reflects all payments which are created for expenses which are not yet charged. The expenses
which are acknowledged when they are charged and ignoring the time period that when they are
shown as paid or they are paid. The payments which are paid earlier are not billed and even
charged so they will be not traced as an expense and they will be referred as asset. All the
expenses which are paid earlier required to be adjusted in the end of accounting period. The
accounting period is mostly accounted at quarterly rate but the organizations can identify their
own accounting times. The insurance premiums are paid always prior to the time which has been
recovered by payment, and debited as prepaid insurance and credited for the cash which has been
paid. In the same series the amount which is prepaid is charged will be affecting the balance will
be decreased in prepaid account (Harris and Stahlin, 2018).
Prepaid insurance (balance sheet)
Debit Credit
Increase an asset Decreases an asset
Preliminary balance 12000 Adjusting entry 6000
Correct balance 6000
Insurance expense (Profit and loss statement)

Debit Credit
Increase an expense Decreases as expense
Preliminary balance 6000
Adjusting entry 6000
Correct balance 12000
The adjusting journal entry for the prepaid insurance is as follows:
Date Name of account Debit Credit
31 march, 2017 Insurance expense 6000
Prepaid Insurance 6000
Interpretation: The above adjustment is giving brief understanding on the alteration of
prepaid insurance which is now 6000, as the perfect amount which has been paid in advance. The
income statement account Insurance expense is been raised by 6000 as an entry of adjusting. The
main assumption in this adjustment that amount which has been paid earlier is referred as an
amount which is already used and expired within the present accounting period. The remaining
balance at the accounting year's end in the current asset as prepaid insurance will be carry
forward to coming accounting year (Mensah, Ayagre and Nyante, 2016).
CONCLUSION
By concluding, prepaid expenses can be interpreted that advance payments by any
organization for rent, supplies and any other that are yet to be consumed so they are considered
as the asset of the company.

REFERENCES
Books and Journals
Harris, P. and Stahlin, W., 2018. GAAP to IFRS Income Conversion Case Study: An
Examination of SEC Noted Accounting Differences. The Accounting Educators'
Journal. 27(1).
Mensah, C. C., Ayagre, P. and Nyante, H., 2016. Fundamentals Of Financial Accounting 1.
Warren, C. S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
ONLINE
Adjusting entries, 2018. [Online]. Available through
:<https://www.accountingcoach.com/adjusting-entries/explanation/2>.
Prepaid expense, 2018. [Online]. Available through
:<http://www.accountingverse.com/accounting-basics/prepaid-expense.html>.