If a company purchases a 12-month insurance policy for $3600, what journal entry would be prepared to record the purchase? At 6 months? At year end?
To record the purchase of a 12-month insurance policy for $3600 in the company's books, you would typically use the following journal entry:
At the time of purchase:
Debit: Insurance Expense (or Prepaid Insurance) $3600
Credit: Cash (or Accounts Payable, if purchased on credit) $3600
This journal entry represents an increase in the Prepaid Insurance asset account or an expense account, depending on the company's accounting policy.
Now, let's look at the journal entries that would be prepared at 6 months and year end:
At 6 months:
Debit: Insurance Expense (or Prepaid Insurance) $1800
Credit: Prepaid Insurance $1800
This journal entry records the expired insurance coverage for the first 6 months. You reduce the Prepaid Insurance asset account and recognize it as an Insurance Expense over that period. The remaining balance in the Prepaid Insurance account will represent the unexpired portion of the insurance policy.
At year-end:
Debit: Insurance Expense (or Prepaid Insurance) $1800
Credit: Prepaid Insurance $1800
This journal entry replicates the process of the 6-month journal entry. It recognizes the remaining 6 months' worth of insurance coverage as an expense and reduces the Prepaid Insurance asset account accordingly.
Note that the specific accounts used may vary based on company-specific requirements or accounting policies, so be sure to consult with your company's accountant or follow generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) when preparing journal entries.