An adjusting entry to record expired insurance would involve which accounts?

An adjusting entry to record expired insurance would involve which accounts?

• A. Prepaid Insurance and Cash
• B. Insurance Expense and Prepaid Insurance
• C. Insurance Expense and Cash
• D. Prepaid Insurance and Unearned Revenue

Answer: (B)

When you pay for insurance in advance, you record it as a Prepaid Insurance asset. Over time, part of that prepaid amount expires and becomes a cost of the period. The adjusting entry shifts that expired portion from the asset to an expense, so you recognize Insurance Expense and reduce Prepaid Insurance. This aligns the expense with the period in which the insurance coverage actually provides benefits. So the correct entry is to Debit Insurance Expense and Credit Prepaid Insurance. Cash isn’t part of the adjustment because the cash outflow occurred when you originally paid the premium. Using Unearned Revenue isn’t appropriate here, since insurance isn’t a source of unearned liability.

When you pay for insurance in advance, you record it as a Prepaid Insurance asset. Over time, part of that prepaid amount expires and becomes a cost of the period. The adjusting entry shifts that expired portion from the asset to an expense, so you recognize Insurance Expense and reduce Prepaid Insurance. This aligns the expense with the period in which the insurance coverage actually provides benefits.

So the correct entry is to Debit Insurance Expense and Credit Prepaid Insurance. Cash isn’t part of the adjustment because the cash outflow occurred when you originally paid the premium. Using Unearned Revenue isn’t appropriate here, since insurance isn’t a source of unearned liability.