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debsaccount · Sep 25, 2007, 07:23 PM

You buy 10,000 worth of insurance for 2 years on April 1 . I need to journalize these transactions on April 1st than on Dec. 31st. I need to make adjusting entries on accounts except cash listing T-accounts and doing the balance sheet first.

manik chand dey · Jun 24, 2008, 12:23 AM

10,000 for 2 years is coming approx to Rs. 417 per month

so for 9 months (Apr 1 through dec 31) the amount will be Rs. 3750 (expired amount)

April 1 prepaid insurance a/c DR 10,000
to cash a/c 10,000

Dec 31 insurance a/c DR 3750
to prepaid insurance a/c 3750

hence ultimately the balance in the prepaid a/c will be left 10,000-3750=6250 (this is the unexpired amount)

Balance sheet

In asset side of the balance sheet, prepaid insurance will be shown at 10,000 with a corresponding equal decrease in cash of 10,000. Hence the first transaction will be in no way affecting the liability side.

In next transaction insurance expense will reduce the equity balance by the amount of 3750 with an equal corresponding decrease in prepaid insurance a/c.