If a 2,400 annual prepaid insurance covers 12 months, what is the adjusting entry at month-end to recognize one month of insurance expense?

• A. Debit Insurance Expense; Credit Prepaid Insurance
• B. Debit Prepaid Insurance; Credit Insurance Expense
• C. Debit Prepaid Insurance; Credit Cash
• D. Debit Insurance Expense; Credit Cash

Answer: (A)

Adjusting prepaid expenses to reflect the portion used in the period. Prepaid Insurance is an asset representing future coverage. As one month passes, part of that asset has been consumed and should be expensed to match the period’s costs. The monthly amount is 2,400 divided by 12 months = 200. The adjusting entry records the expense by Debiting Insurance Expense for 200, and reducing the prepaid asset by Credit Prepaid Insurance for 200. Cash is not affected because the payment was made previously. This aligns with accrual accounting and the matching principle.