[nandkishor124]

Hi
Could anyone please guide me regarding the journal entry for prepaid insurance?
Why cash account is not included in the entry ?

[Just Looking]

Prepaid Insurance means that you have paid for an insurance policy that will last for some length of time. At the time you purchase it, the entry is to debit Prepaid Insurance and credit Cash.

The Matching Principle in Accounting states that you should match revenues with the costs that are incurred to make that revenue. Since the policy lasts for a period, you want to write off the expense over a period. Otherwise, your net income would be skewed (in this case understated) in the month you paid for the insurance.

So, to answer your question, cash is included in the original entry to set up Prepaid Insurance. At that point, you have an asset for the amount of the prepayment. It gets used up over time, though. You aren't paying out more cash so you don't credit cash. You are writing off the Prepaid Insurance as it expires, which is why you write down (credit) the Prepaid Insurance over the length of the policy, with the debit being an expense. That debit is to expense the cost of the policy in the appropriate period of when it was actually an expense to the company.

I hope that makes more sense to you now.