Which of the following is an example of a prepayment?

• A. Prepaid insurance
• B. Notes receivable
• C. Accounts receivable
• D. Trade receivables

Answer: (A)

Verified step by step guidance

1. Understand the concept of prepayment: A prepayment occurs when a company pays for goods or services in advance before they are received or consumed. This is recorded as an asset on the balance sheet until the benefit is realized.
2. Analyze the options provided: Prepaid insurance, Notes receivable, Accounts receivable, and Trade receivables.
3. Focus on 'Prepaid insurance': This represents a payment made in advance for insurance coverage that will be used in the future. It is a clear example of a prepayment because the company has paid for a service before it is consumed.
4. Evaluate the other options: Notes receivable, Accounts receivable, and Trade receivables are not prepayments. These represent amounts owed to the company by others, which are classified as receivables rather than prepayments.
5. Conclude that 'Prepaid insurance' is the correct example of a prepayment, as it aligns with the definition of paying for a service in advance and recording it as an asset until the benefit is realized.