Paid premium on a one-year insurance policy is classified as which of the following?

• A. Accrued expense
• B. Unearned revenue
• C. Accrued revenue
• D. Prepaid expense

Answer: (D)

Paying for a one-year insurance policy in advance is a prepayment for services you will receive in the future. In accrual accounting, prepayments are assets because they represent a benefit to be used later. The amount is recorded as Prepaid Insurance (an asset) when paid, and over the policy period this asset is gradually expensed as the insurance coverage is consumed. That’s why this is classified as a prepaid expense. The other concepts describe different situations: accrued expense is a liability for costs incurred but not yet paid; unearned revenue is a liability for money received before the service or goods are delivered; accrued revenue is revenue earned but not yet collected.