Prepaid insurance is what kind of asset

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Mailing Address P. Box Monterey, California Monterey, California. Request a Quote. Home Blog Is prepaid insurance an asset? What is Prepaid Insurance? An Exception to the Current Asset Rule Rarely, an insurance policy will extend coverage beyond the month accounting period following payment of the initial premium.

Charge the invoice from the insurance company to the prepaid expenses account. Record the expense in the reconciliation worksheet used for prepaid expenses. Determine the number of periods over which the prepaid amount will be amortized. Indicate the amount of amortization to be charged in each period.

In each period, make an adjusting journal entry amortizing that amount as an insurance expense on the income statement. Key Takeaways Prepaid insurance is a current asset if coverage is used within one year of payment. Should coverage extend beyond 12 months, that portion can be a long-term asset.

The asset is converted to an expense for the period in which the prepaid is used. The company has a right to occupy the property for the period of time paid for. Until the expense is consumed, it is treated as a current asset on the balance sheet. As the asset is consumed, it is removed from the balance sheet and expensed through the income statement via retained earnings.

If a company does not consume the prepaid expense within twelve months of payment, it will be reported under long-term or non-current assets. The premium that is paid will usually be the same. In many cases, yes, you will pay slightly less for a longer period of coverage than you will for monthly coverage.

Many companies offer discounts for paying your auto insurance in larger amounts, such as semiannually or annually. You may also reduce billing fees by paying this way. But other types of insurance are also often discounted when they are paid for up front. It all depends upon the term of the prepaid coverage and the insurer. The amount that is recorded will then drop by a certain amount each month until the asset has expired. Then another payment must be made in order to keep the coverage in force.

This process will repeat itself over and over for as long as the insured maintains coverage with the insurer. Prepaid insurance is a credit to the insurance company at the time that it is made. In the previous example, the premium that is received for six months of car insurance coverage is initially recorded as a credit. Then there is a monthly debit for each month in the term until the credit is zero. Prepaid insurance is commonly used by car and health insurance companies as well as malpractice and liability insurers.

The amount paid before the term begins is considered an asset by the insurance company, and this asset declines in value every month until the term has expired. Consult your agent for more information on prepaid insurance and how it can affect you.