JE-11 Jan 2026Manualposted
Pay the annual premium.
| Account | Dimensions | Debit | Credit |
|---|---|---|---|
| 1300 Prepaid insurance | 12,000 US Dollar | ||
| 1000 Cash | 12,000 US Dollar | ||
| Totals | 12,000 US Dollar | 12,000 US Dollar | |
Balanced.
Journal entry for prepaid insurance
When the premium is paid, debit Prepaid insurance and credit Cash. At each month-end, debit Insurance expense and credit Prepaid insurance for the month's share of the policy, until the prepaid balance reaches zero.
- Annual premium
- $12,000
- Monthly expense
- $1,000
- Prepaid after month 1
- $11,000
- Entity
- Illustrative company
- Basis
- Accrual
- Currency
- USD
- Period
- January 2026
The worked example
On January 1, 2026 the company pays $12,000 for a twelve-month general liability policy running from that day. Released evenly, each month carries $1,000 of insurance expense and the prepaid balance walks down to zero at the end of the policy.
Transaction · January 1, 2026
Adjusting entry · January 31, 2026
JE-231 Jan 2026Adjustingposted
Release January's share of the policy.
Journal entry JE-2, 2 lines Account Dimensions Debit Credit 6200 Insurance expense 1,000 US Dollar 1300 Prepaid insurance 1,000 US Dollar Totals 1,000 US Dollar 1,000 US Dollar Balanced.
Prepaid insurance, released evenly over the policy
Computed by the same tested function the toolbelt runs. The last period absorbs any rounding, so the schedule sums to the cent.
| Month | Insurance expense | Prepaid remaining |
|---|---|---|
| Jan 2026 | 1,000.00 | 11,000.00 |
| Feb 2026 | 1,000.00 | 10,000.00 |
| Mar 2026 | 1,000.00 | 9,000.00 |
| Apr 2026 | 1,000.00 | 8,000.00 |
| May 2026 | 1,000.00 | 7,000.00 |
| Jun 2026 | 1,000.00 | 6,000.00 |
| Jul 2026 | 1,000.00 | 5,000.00 |
| Aug 2026 | 1,000.00 | 4,000.00 |
| Sep 2026 | 1,000.00 | 3,000.00 |
| Oct 2026 | 1,000.00 | 2,000.00 |
| Nov 2026 | 1,000.00 | 1,000.00 |
| Dec 2026 | 1,000.00 | 0.00 |
What the entries do to the accounts
Every entry above posted to the ledger, starting from zero balances: the net debit or credit each account is left with. Debits equal credits, so the books still balance.
| Account | Debit | Credit |
|---|---|---|
| 1000 Cash | 12,000 US Dollar | |
| 1300 Prepaid insurance | 11,000 US Dollar | |
| 6200 Insurance expense | 1,000 US Dollar | |
| Totals | 12,000 US Dollar | 12,000 US Dollar |
Why it is booked this way
The premium buys twelve months of cover. On the day it is paid nothing has been used, so the whole amount is an asset — the right to future cover — and the cash leaving the bank is an exchange of one asset for another, not a cost.
Each month one twelfth of the cover is consumed. The adjusting entry moves that twelfth from the balance sheet to the P&L, so every month of the policy carries the same insurance cost regardless of when the premium was paid. That is the matching principle in its plainest form.
The schedule is the control. At any month-end the prepaid balance on the balance sheet must equal the unexpired months on the schedule; if it does not, an entry was missed or doubled.
Common mistakes
- Expensing the whole premium in the month it is paid, which overstates that month's cost and understates the next eleven.
- Booking the monthly release but never reconciling the prepaid balance to the schedule, so a cancelled or renewed policy leaves a balance nobody can explain.
- Releasing the policy from the payment date rather than the cover start date.
Questions
- Is prepaid insurance an expense?
- No. A premium that buys cover for future months is an asset on the day it is paid: the company has bought something it has not yet used. It becomes expense month by month as the cover is consumed.
- Is prepaid insurance a current asset?
- Prepaid insurance is a current asset when the cover runs out within twelve months of the balance sheet date, which is true of an annual policy. Cover beyond twelve months is a non-current prepaid.
- Should I amortize by month or by day?
- Evenly by month is the common policy and what most auditors accept for a policy that starts on the 1st. A policy starting mid-month can be released by days of cover, which gives a stub month at each end.
Terms on this page
Work with this entry
The tool that computes the schedule, the concept behind it, the entries that come next and the components that render them.
- Prepaid & deferred releaseA premium paid on the 17th does not release in twelve equal slices. Day-weighted, or even — your call. Put your own figures in and get the schedule behind this entry.Tool
- Prepaid expenses, explained for foundersCash paid before you use what it buys, like a year of software or insurance. It's an asset that runs down month by month.Doc
- Accrual basis vs cash basisCash basis records revenue and expenses when money moves; accrual basis records them when they are earned and incurred — so a cost paid a year in advance is one month's expense under cash and twelve months' under accrual.Compare
- Debit vs creditA debit is an entry on the left side of an account and a credit is an entry on the right; neither means increase or decrease on its own — a debit increases assets and expenses and decreases liabilities, equity and revenue, and a credit does the opposite.Compare
- Prepaid expense vs accrued expenseA prepaid expense is cash paid before the cost is used, an asset; an accrued expense is a cost used before it is paid or billed, a liability — the same timing difference running in opposite directions.Compare
- Accrual vs deferralAn accrual records revenue or expense before the cash moves; a deferral records cash that has moved before the revenue or expense is recognized — accruals create receivables and payables, deferrals create prepaids and deferred revenue.Compare
- Depreciation vs amortizationDepreciation spreads the cost of a tangible asset over its useful life; amortization does the same for an intangible asset — and, in loans and prepaids, for the paying down of a balance over time.Compare
- Journal entry for prepaid rentWhen rent is paid in advance, debit Prepaid rent and credit Cash. At each month-end, debit Rent expense and credit Prepaid rent for the month the space was used.Entry
- Journal entry for a prepaid software subscriptionWhen an annual software subscription is paid up front, debit Prepaid software and credit Cash (or Accounts payable). Each month-end, debit Software expense and credit Prepaid software for the days of service used that month.Entry
- Journal entry for accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.Entry
- ScheduleTableOne shell, seven presets. Prepaids through debt.Component
- JournalEntryDebit and credit as two columns. No signed-column variant.Component
An illustrative company, not anyone’s real books. Every figure on this page is computed from the inputs in the example and posted by the same functions as the journal entry balancer. General information for US companies under US GAAP, not accounting or tax advice.