What is the adjusting entry for expired insurance of 1,200 paid in advance?

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

Answer: (D)

When insurance is paid in advance, the payment is recorded as Prepaid Insurance, an asset. As time passes, the portion of that prepaid amount that has expired becomes an expense. The adjusting entry transfers the expired amount from the asset to the expense: Debit Insurance Expense for 1,200 to recognize the cost in the current period, and Credit Prepaid Insurance for 1,200 to reduce the asset by the same amount. This reflects the accrual principle that costs are recognized when incurred, not when the cash was paid. Debiting the asset or crediting cash would misstate either assets or cash flow, and crediting Insurance Expense would not correctly reflect the use of the prepaid asset.