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    student007's Avatar
    student007 Posts: 60, Reputation: 2
    Junior Member

    Mar 2, 2006, 01:07 PM
    Prepaid insurance an asset?
    According the GAAP (the 3 asset criteria), how can I justify that Prepaid insurance is an asset? (i.e. I know that costs are known and that it will provide future benefit for the company, but is this future benefit measurable)?
    manik chand dey's Avatar
    manik chand dey Posts: 63, Reputation: 2
    Junior Member

    Jun 24, 2008, 08:37 PM
    Recognising an item as an asset in the balance sheet depends on whether its cost or value can be estimated reliably. Hence all the assets are not recognised in the balance sheet.For example INTERNALLY GENERATED BRAND are not recognised as an asset in the balance sheet, as its value cannot be measured reliably.

    Going by the definition as a certain sum of money is paid beforehand as prepaid insurance for a definite period, hence it is recognised as an asset in the balance sheet.
    cleanme's Avatar
    cleanme Posts: 1, Reputation: 1
    New Member

    Nov 7, 2011, 08:44 AM
    Is insurance a asset? I am doing a accounting program and it says that he has $2,000 insurance. It does not say what kind. Is this considered a asset or liability?
    youcanfind's Avatar
    youcanfind Posts: 1, Reputation: 1
    New Member

    Nov 30, 2011, 12:24 AM
    In this case it would be better to consider it as an expense.
    pready's Avatar
    pready Posts: 3,197, Reputation: 207
    Ultra Member

    Nov 30, 2011, 06:59 AM
    when you purchase insurance it is an asset because it will provide a future economic benefit that is measurable.

    As you use the insurance it is an expnense because you are matching expenses to revenues in the period they are earned and used.

    For an example: you purchase insurance for $1,200 for a 1 year policy. Now you have not used the one policy yet, so it an asset. The journal entry to record this is:
    Debit Prepaid Insurance for 1,200
    Credit Cash for 1,200

    Now as you use the policy it will be expensed. In the above example if you purchased the poclicy on Jul 1 and you are preparing your financial reports on Dec 31 you have to expense 6 months of insurance used (Jul, Aug, Sep, Oct, Nov, and Dec) so your journal entry (known as an adjusting entry) will be:
    Debit Insurance Expense for 600
    Credit Prepaid Insurance for 600

    the calculation to cumpute the amount is:
    Cost * number of months used / total number of months of policy.
    So $1,200 * 6/12 = 600.

    Now since you have used 6 months of insurance you still have 6 more months of insurance to use (Jan, Feb, Mar, Apr, and May) and your Prepaid balance is $600, which is 6 months worth of insurance to use.
    blueeyes39's Avatar
    blueeyes39 Posts: 2, Reputation: 1
    New Member

    Feb 28, 2013, 06:19 AM
    I have a question on prepaid insurance?given I have 3 different policies
    A)10824.00 D.f .P 4/1/2010 for 24mo.
    B)9624.00 D.F.P 4/1/2011 for 36 mo.
    C)8424.00 D.F.P 8/1/2011 for 12mo.
    They want the
    Insurance Expense
    Prepaid Insurance
    pready's Avatar
    pready Posts: 3,197, Reputation: 207
    Ultra Member

    Feb 28, 2013, 07:39 AM
    You need to calculate the amount of insurance that has expired. i.e. How many months during your accounting period. Once you calculate the amount of insurance expired or used during the period you need to calculate the amount used. So take the amount of prepaid times the number of months of use divided by the total number of months of your policy equals your insurance expense. Once you have your insurance expense simply subtract it from your prepaid amount to get your prepaid account balance.
    blueeyes39's Avatar
    blueeyes39 Posts: 2, Reputation: 1
    New Member

    Feb 28, 2013, 07:51 AM
    can I get the equation written out so I can see it.
    at the bottome of it says: the total premium for each policy was paid in full (for all months) at the purchase date, and the prepaid insurance account was debited for the full cost. Year-end adusting entries for prepaid insurance were properly recorded in all prior years.

    I even did the way you gave me still no luck. Do you add them all to get the answer?
    pready's Avatar
    pready Posts: 3,197, Reputation: 207
    Ultra Member

    Feb 28, 2013, 10:28 AM
    Do A, B, and C separately, then add the amounts together to get the total amount for both the Expense and the Prepaid.

    Simply start at your beginning of your accounting period with the amount of the prepaid purchase amount times number of months from your beginning accounting period to the end of your accounting period divided by the total number of months of each policy purchased.

    So for number A. take $10,824 times number of months in the accounting period divided by 24 months to get your insurance expense.

    Now do this for number A. then plug in your numbers for B, and C, to get your individual amounts, then add together to get your total insurance expense amount.

    For the prepaid account balance simply subtract your insurance expense amount from your prepaid account balance at the beginning of your accounting period.

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