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General Accounting Discussions: Effect on Expense Account

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    • CommentAuthordbiegner
    • CommentTimeApr 18th 2007
     
    What effect does a decrease in prepaid insurance have on the Insurance Expense?
    • CommentAuthorcajay
    • CommentTimeApr 18th 2007
     
    If you pay for a year's worth of insurance today for $12,000 the entry is:
    Dr. Prepaid Insurance 12,000
    Cr. Cash 12,000

    After one month goes by, you will recognize the expense as:
    Dr. Insurance Expense 1,000
    Cr. Prepaid Insurance 1,000

    A decrease in assets will cause an increase in liabilities or equity, to balance the equation.
    In this case, a decrease in prepaid interest will increase you Insurance expense( Equity)

    Hope this helps!!
    • CommentAuthordbiegner
    • CommentTimeApr 18th 2007
     
    Thanks. Here is the actual question:
    At the beginning of the year, prepaid insurance is $7000. At the end of the year, prepaid insurance is $3400. What effect does this have on the Insurance account, which is $16,800? I say it increases the account. My teacher says it decreases the account. Who's right?
    • CommentAuthordbiegner
    • CommentTimeApr 18th 2007
     
    One more thing, The real question is: How much cash was paid for the expense?
    • CommentAuthorcajay
    • CommentTimeApr 18th 2007
     
    To answer this question, set up a little account schedule like this:

    01/01/07 Prepaid Insurance 7,000 (debit balance)
    (3,600) (credit)
    12/31/07 Prepaid Insurance = 3,400 (debit balance)

    To go from 7000 to 3400, you need a credit of 3,600.
    I'm not sure which insurance account you mean, prepaid or expense??
    If you're confused on a test or something, just ask yourself:
    do I have more assets or less assets?
    do I have more expenses or less expenses?
    So if you have 7000 beg. bal, and it drops to 3400 end bal. you have LESS assets. The account decreases!!!!
    • CommentAuthordbiegner
    • CommentTimeApr 18th 2007
     
    Insurance expense account

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