Answer to Question #177628 in Accounting for Milan

Question

Debit Insurance Expense

Credit Prepaid Insurance

• What does this journal entry mean? Insurance Expense increase because its an expense and Prepaid Insurance is an asset and that decreases. So, you purchase insurance expense and prepaid insurance is acting like cash because you are paying for it. Is this statement correct?

Debit Prepaid Rent

Credit Cash

• What does this journal entry mean? You make an advance payment which is the Prepaid Rent (asset) and you pay cash which decreases this account. Is this statement correct? Please correct my statement.

Answer 1

a)     Debit Insurance Expense

Credit Prepaid Insurance

Yes, the statement is correct.

Additionally, when the insurance premiums are paid in advance, they are referred to as prepaid.  As the prepaid amount expires, the balance in Prepaid Insurance is reduced by a credit to Prepaid Insurance and a debit to Insurance Expense. This is done with an adjusting entry at the end of each accounting period mostly monthly or yearly.

b)     Debit Prepaid Rent

Credit Cash

Yes, the statement is correct.

These are both asset accounts and do not increase or decrease a company's balance sheet. Cash is credited because is decreasing the account.