What Does Prepaid Insurance Expense Mean?
A prepaid insurance expense is the amount of premiums paid for insurance that are recorded in the balance sheet as assets at the time of payment because coverage has not started yet. As soon as coverage begins, a portion of the amount is recorded as expense until each payment is used up and these assets are eventually turned into expenses.
Insuranceopedia Explains Prepaid Insurance Expense
Insurance is basically a prepaid expense, because once one purchases a policy, the service (or coverage) will be received in the future. For instance, a death benefit cannot be given to the policyholder if he or she is still alive. The same goes for risks which cannot be covered until they actually happen. Thus, in accounting, the payments made for insurance are tentatively entered as assets.
Supposing a company has paid commercial property insurance for a building for $60,000 that covers an entire year. Each month after coverage begins, $5,000 is transferred from asset to expense. By the end of the year, all payments become expenses.