What type of account is Prepaid Insurance? a. asset b. liability

What type of account is Prepaid Insurance?

a. asset

b. liability

c. equity

Answer: a. asset

Prepaid Insurance is included in the current assets of a business organization in its balance sheet. This classification arises from the nature of prepaid expenses, which are payments made in advance for merchandise, services, or materials that are used up in the business process within the period succeeding the balance sheet date. When a company pays for insurance coverage in advance the money received by the insurance company forms what is referred to as a prepaid insurance account. This account depicts the level of insurance coverage that the company has subscribed to but has not utilized. Over some time and as the insurance coverage begins to be made, the prepaid insurance asset is charged on the income statement monthly, among others. This accounting treatment follows the matching concept which aims at acknowledging expenses together with the value it gives. When the coverage provided by insurance is for twelve months or less, the insurance is recorded in the balance sheet as prepaid expenses under current assets. This asset classification properly identifies a future economic benefit that the prepaid insurance offers to the company.