If a company pays for insurance in advance, what is the adjusting entry at period end to recognize the used portion?

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

Answer: (D)

When insurance is paid in advance, it’s recorded as an asset called Prepaid Insurance. As time passes, part of that asset is consumed, so you must move the amount used from the asset to an expense. The adjusting entry reflects the portion of the prepaid amount that has been used during the period: Debit Insurance Expense to recognize the cost of the insurance consumed, and Credit Prepaid Insurance to reduce the asset accordingly.

For example, if $1,000 of prepaid insurance has been used this period, you would debit Insurance Expense for $1,000 and credit Prepaid Insurance for $1,000. This aligns the expense with the period it benefits and shows a lower asset balance on the balance sheet.

Other options either record the initial cash payment instead of the end-of-period adjustment, or involve accounts that don’t apply to insurance (such as revenue), or would incorrectly affect cash again.