This method is generally what is shown in textbooks as it most closely follows the theory of why we record prepaid expenses. The prepaid expense is recorded when cash is spent and then it is reduced as the item is utilized. This translates into improved cash flow management and enhanced budgetary control, creating a favorable environment for resource allocation and growth-oriented endeavors.
"Time-wise, it's going to hurt us a lot," added Russell Brehm, the terminal manager in Baltimore for Lee Transport, which trucks hazardous materials such as petroleum products and chemicals. The loss of the bridge will double to two hours the time it takes Lee to get loads from its terminal in Baltimore's Curtis Bay to the BJ's gasoline station in the waterfront neighborhood of Canton, he estimated. Chamber of Commerce, said that the bridge is a critical connector of "people, businesses, and communities."
How do prepaid expenses affect cash flow?
A prepaid expense is carried on an insurance company's balance sheet as a current asset until it is consumed. That's because most prepaid assets are consumed within a few months of being recorded. When the insurance premiums are paid in advance, they are referred to as prepaid. The amount of the insurance premiums that remain prepaid at when a business pays for insurance, prepaid insurance is the end of each accounting period are reported in the current asset account, Prepaid Insurance. The balance in this account will be combined with the balances in other prepaid expense accounts and will be listed on the balance sheet as prepaid expenses. A business buys one year of general liability insurance in advance, for $12,000.
When the asset is charged to expense, the journal entry is to debit the insurance expense account and credit the prepaid insurance account. Thus, the amount charged to expense in an accounting period is only the amount of the prepaid insurance asset ratably assigned to that period. Company A operates a delivery fleet and decides to secure insurance coverage for a full year to safeguard its vehicles. On November 15, Company A pays an insurance premium of $6,000 in advance to its insurer. The coverage period is set to begin on December 1 and continue until November 30 of the following year. By recording a debit of $6,000 to the prepaid insurance account and a credit of $6,000 to the cash account on November 15, the company acknowledges the prepayment.
Example of Payment for Insurance Expense
The other bond companies will not “accept hard assets such as real estate as collateral,” but “will only accept cash or cash equivalents (such as marketable securities),” his lawyers said. "It is my intention that the federal government will pay for the entire cost of reconstructing that bridge, and I expect Congress to support my effort," Biden said. The purpose of this blog and its comments section is to inform readers about Federal Trade Commission activity, and share information to help them avoid, report, and recover from fraud, scams, and bad business practices. We review all comments before they are posted, and we won’t post comments that don’t comply with our commenting policy. Trump’s lawyers had asked the state appeals court to either reduce the amount of money he had to post or stay the award without him posting any security while he appeals Engoron’s order. President Biden said Tuesday that the federal government, with congressional support, would pay to rebuild the bridge.
Businesses can manage prepaid expenses effectively by accurately recording transactions, monitoring the consumption of prepaid items, making timely adjustments, and implementing proper internal controls and procedures. As the insurance coverage period progresses and a portion of the prepaid insurance is utilized, an adjusting entry is required. In this case, the company debits the "Insurance Expense" account and credits the "Prepaid Insurance" account.
Prepaid Insurance Journal Entry
On the other hand, you would record a prepaid expense when the payment is made in advance for goods or services that will benefit the company in future periods. Prepaid insurance refers to advance payments made by individuals and businesses for upcoming insurance coverage, recorded as assets until utilized. This transition from an asset to an expense occurs to accurately reflect the actual consumption of the insurance coverage.