When K applies for a life insurance policy on herself and submits the initial premium, which journal entry should be recorded in K's accounting records?

• A. Debit Cash; Credit Insurance Revenue
• B. Debit Prepaid Insurance; Credit Cash
• C. Debit Insurance Expense; Credit Accounts Payable
• D. Debit Insurance Payable; Credit Prepaid Insurance

Answer: (B)

Verified step by step guidance

1. Understand the nature of the transaction: K is applying for a life insurance policy and submitting the initial premium. This payment represents a prepaid expense because the insurance coverage will be provided over a future period.
2. Identify the correct accounts involved: Prepaid Insurance is an asset account that represents the amount paid in advance for insurance coverage. Cash is reduced because the payment is made upfront.
3. Determine the journal entry: The initial premium payment decreases Cash (credit) and increases Prepaid Insurance (debit), reflecting the advance payment for future insurance coverage.
4. Analyze why other options are incorrect: For example, 'Debit Insurance Expense; Credit Accounts Payable' is incorrect because the payment is not an expense yet—it is prepaid. Similarly, 'Debit Cash; Credit Insurance Revenue' is incorrect because this transaction does not generate revenue.
5. Record the journal entry: Debit Prepaid Insurance to increase the asset account and Credit Cash to decrease the cash account, ensuring the accounting equation remains balanced.