Accounting for IGCSE & O level - The Fundamentals Of Accounting (Section 6 - No. 11)
When a company pays for insurance in advance for multiple months, how should it be recorded?
As an expense in the current month.
As an asset (prepaid insurance) initially and then gradually expensed over the coverage period.
As a liability.
It is not recorded until the insurance coverage starts.
Explanation
Advance payments for insurance are initially recorded as an asset (prepaid insurance). As the insurance coverage is used, the prepaid insurance asset is reduced, and an expense is recognized.
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