Prepaid expenses in accounting are shown as current assets on the balance sheet and represent payments for goods or services that have not yet been received. As the prepaid items are consumed, they are gradually recognized as expenses on the income statement through adjusting journal entries. The accounting treatment of prepaid insurance involves a systematic process to accurately reflect its financial impact.
Like all financial products, prepaid insurance has both advantages and disadvantages to consider. Without prepaid insurance, you would have to bear the full financial burden of repairing or replacing the machinery. However, with prepaid insurance, you were able to protect your business and ensure that you could continue operating without significant disruption. At the end of each month, an adjusting entry of $400 will be recorded to debit Insurance Expense and credit Prepaid Insurance. As the policy is consumed from month to month, the policy’s value for those months will be recorded as a credit, and the entries in the two columns will eventually cancel out or total zero. Prepaid insurance is important because a business should correctly record all of its transactions and resources to have accurate financial statements.
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It’s not unprecedented — some large companies have previously posted appellate bonds of $1 billion or more. Mitchell Epner, a former federal prosecutor who is now a litigator in private practice in New York, told CNN the judgment against Trump when a business pays for insurance, prepaid insurance is is notably large. In a case filing, Senior Assistant Solicitor General Dennis Fan pushed back on Trump’s request to halt the order, writing that there is “nothing unusual” about billion-dollar judgments being fully bonded on appeal.
In this way, the asset value of the prepaid insurance will be reduced to zero at the end of the time period which was paid for in advance. Similarly, the expense will reach the total of the prepaid amount at the end of that same period. In exchange, the insurance company usually offers the customer a discount on the premium price, so the business saves money on the policy. The result of method 2 is an insurance expense of $2,500 and a prepaid expense of $7,500, which is the exact result of method 1.
Positive Effects of Prepaid Expenses on a Business
She added that freight services from Asia to the East Coast in the U.S. have already been hampered by drought in the Panama Canal, as well as risks related to conflict in the Red Sea. Nearby ports, including those in New York, New Jersey and Virginia, will be relied on to handle more shipments if Baltimore remains inaccessible. The top port in the U.S. for sugar and gypsum imports, it is the ninth busiest U.S. port by the total volume and value of foreign cargo handled. Synergy Marine, founded in 2006, provides a range of ship management services, including managing ships’ technical components and their crews and overseeing safety, according to S&P Capital IQ.