One such task is dealing with insurance expiration and making the necessary adjusting entries in your books. In this article, we’ll dive into the specifics of adjusting entries related to insurance prepaid insurance expiration, using the example of insurance expired during May for $275. Prepaid expenses journal entries provide a clear and credible record of advance payments. Recording prepaid expenses might sound like a snooze fest, but it’s crucial for keeping your books straight. The first step is to debit the Prepaid Expense account (an asset account) and credit the account you used to pay, like Cash or Checking. When you make this payment, it shows up as an asset on your balance sheet, signaling future benefits.

Recognizing the Expense (As the Benefit is Received)

• During the month you will use some of this insurance, but you will wait until the end of the month to account for what has expired.
• The balance sheet reports the assets, liabilities, and owner’s (stockholders’) equity at a specific point in time, such as December 31.
• You should consider our materials to be an introduction to selected accounting and bookkeeping topics (with complexities likely omitted).
• The entity needs to pay the insurance fees on a yearly basis in order to receive the insurance cover.
• Adjusting journal entries are essential in the accrual accounting system, ensuring that accounts reflect the passage of time accurately.

Even experienced teams encounter challenges in prepaid expense reconciliation. To determine recoverability, identify any factors that could reduce a prepaid expense’s value, such as operational shifts, regulatory changes, or vendor failures. For example, if an upfront-paid subscription becomes irrelevant due to a strategic pivot, it may bookkeeping for cleaning business need to be written off. A business incurred $1,200 in utility expenses in December, but the bill will not be paid until January.

• Not only does this catch errors early, but it also ensures that all necessary adjustments are promptly made, keeping your books in real-time sync with the reality of your operations.
• Use specific subaccounts, such as Prepaid Insurance or Prepaid Software, to improve tracking and reporting.
• One of the main financial statements (along with the statement of comprehensive income, balance sheet, statement of cash flows, and statement of stockholders’ equity).
• As the benefits are realized, the corresponding amount is expensed on the income statement, which aligns with the matching principle.
• It’s like moving money from your savings account to your checking account—you haven’t lost anything, you’re just reallocating it.
• Prepaid insurance might sound like accounting voodoo, but trust me, it’s way less scary than it seems.

Best Practices when Making Adjusting Journal Entries

Assume $200 of supplies in a storage room are physically counted at the end of the period. Since the account has a $900 balance from the December 8 entry, one “backs in” to the $700 adjustment on December 31. In other words, since $900 of supplies were purchased, but only $200 were left over, then $700 must have been used. Since the policy lasts one year, divide the total cost of $1,800 by 12.

Accounting for Service Cancellations or Non-Use of Prepaid Assets

This account is an asset account, and assets are increased by debits. Credit the corresponding account you used to make the payment, like a Cash or Checking account. You prepaid a one-year rent policy during the month and initially recorded it as an asset because it would last for more than one month. By the end of the month some of the prepaid rent expired, so you reduced the value of this asset to reflect what you actually had on hand at the end of the month ($11,000). To transfer what expired, Rent Expense was debited for the amount used and Prepaid Rent was credited to reduce the asset by the same amount. Any remaining balance in the Prepaid Rent account is what you have left to use in the future; it continues to be an asset since it is still available.

What is the difference between deferrals and accruals in adjusting journal entries?

It has lost $100 of its initial value, so it is now worth only $5,900. contra asset account The $100 balance in the Supplies Expense account will appear on the income statement at the end of the month. The remaining $900 in the Supplies account will appear on the balance sheet. This amount is still an asset to the company since it has not been used yet. Let’s assume you used $100 of the $1,000 of supplies you purchased on 6/1. In addition, on your income statement you will show that you did not use ANY supplies to run the business during the month, when in fact you used $100 worth.