[moonkhan]

I was trying to solve a question, but was little confused with this. The question is
On March 1, 2010, a company paid a $20,000 premium on a 25 month insurance policy for coverage beginning on that date. Now I have to find the Prepaid Insurance Asset and Insurance Expense for Dec 31, 2010, and Dec 2011 by using Accrual Basis, or Cash Basis. I am really confused with what I have to put for Accrual Basis, and what for cash basis. Please I would really appreciate your response to this question . :confused::confused:

[pready]

Cash Basis is very simple as you only record amounts when cash is received or expended(spent). So your journal entry will be:
Debit Insurance Expense for the amount
Credit Cash for the amount.
There will not be a prepaid asset under cash basis.

Accrual Basis Accounting:
First you need to recod the purchase of the insurance premium.
Debit Prepaid Insurance for the amount
Credit Cash for the amount.

For the year end you need to calculate the insurance used during the period, which will be for 10 months out of a 25 month policy. So to calculate the insurance used you take the cost of the insurance * months used / number of months of the policy or $20,000 * 10/25

The journal entry to record the insurance used will be:
Debit Insurance Expense for the amount calculated above
Credit Prepaid Insurance for the amount calculated above.

To calculate your ending Prepaid balance you simply take the cost - your insurance used during the period, or your cost of $20,000 - the amount calculated above.