Prepaid insurance is considered a prepaid expense. The prepaid insurance is an asset of the business and is shown on the balance sheet under current assets, it is something the business has paid for but not yet used. Expense must be recorded in the accounting period in which it is incurred. They are also known as unexpired expenses or expenses paid in advance. When the insurance premiums are paid in advance, they are referred to as prepaid. When the company pays the insurance bill of $300, it will debit the liability account for $75. Prepaid expense is expense paid in advance but which has not yet been incurred. If nothing is prepaid then the Prepaid Insurance account must show a zero balance. Even though this appears to be a simple transaction from an accounting standpoint, it may not be so. With insurance prepayments, you’re buying protection for potential future damage, such as motor vehicle collisions, fires, or floods. It involves two accounts: Prepaid Expense Account and the related Expense Account. At the end of any accounting period, the amount of the insurance premiums that remain prepaid should be reported in the current asset account, Prepaid Insurance. The Prepaid Insurance account must report the true amount that is prepaid (paid but not yet expired) as of the date of the balance sheet. Prepaid insurance is recorded as a current asset since it will not be consumed until a future period. When someone purchases prepaid insurance… The insurance expense account is reduced from 5,400 to the expense for the year of 3,600, and the amount of 1,800 is transferred to the prepaid insurance account. They are an advance payment for the business and therefore treated as an asset.The accounting rule applied is to debit the increase in assets” and “credit the decrease in expense” (modern rules of accounting). If you have paid for several years in advance, it's considered a long-term asset. This will result in $225 being reported as the company's health insurance expense for that pay period. And here is why. The company could also have applied another way of accounting for prepaid insurance. However, this time the company recorded the entire amount of prepaid insurance of $24,000 as insurance expense in the income statement at the time of … Prepaid insurance is insurance paid in advance and that has not yet expired on the date of the balance sheet Balance Sheet The balance sheet is one of the three fundamental financial statements. Accountants consider prepaid rent as an asset on your financial statements, and prepaid insurance is a current asset, too.