Which of the following best describes the amount of insurance expense reported on the income statement?

• A. The portion of prepaid insurance that has expired during the period
• B. The total amount of insurance premiums paid during the period
• C. The amount of insurance premiums owed but not yet paid
• D. The total value of all insurance policies held by the company

Answer: (A)

Verified step by step guidance

1. Understand the concept of insurance expense: Insurance expense represents the portion of prepaid insurance that has been used or expired during the accounting period. It is reported on the income statement as an expense.
2. Review the options provided: The correct description of insurance expense is the portion of prepaid insurance that has expired during the period. Other options, such as the total premiums paid or owed, do not directly represent the expense for the period.
3. Relate the concept to the matching principle: The matching principle in accounting states that expenses should be recognized in the same period as the revenues they help generate. Therefore, only the expired portion of prepaid insurance is recognized as an expense.
4. Consider the accounting treatment: Prepaid insurance is initially recorded as an asset on the balance sheet. As time passes and the insurance coverage is used, the expired portion is transferred from the asset account to the insurance expense account on the income statement.
5. Conclude the reasoning: The amount of insurance expense reported on the income statement is the portion of prepaid insurance that has expired during the period, aligning with the matching principle and proper accounting treatment.