Prepaid expenses



Q38. Prepaid expenses
On December 1, 20×1, Entity A purchased a new insurance plan that covers one year period from December 1, 20×1 to November 30, 20×2. On the same day, $8,400 insurance premium for a year was prepaid.
What are the journal entries to be prepared on December 1 and 31, 20×1?

A38. Prepaid expenses are recorded on the debit side as an asset account.

(1) December 1, 20×1: to record the payment of prepaid insurance expense

  Debit Credit
Prepaid insurance expense 8,400  
     Cash   8,400

[Note]
Increase in prepaid insurance expense (asset): debit

(2) December 31, 20×1: to record the insurance expense for the month of December 20×1

  Debit Credit
Insurance expense 700  
     Prepaid insurance expense   700

[Note]
1. Increase in insurance expense (expense): debit
2. Decrease in prepaid insurance expense (asset): credit
3. Annual insurance expense = $8,400
4. Monthly insurance expense = $8,400 x 1/12 = $700

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