Which of the following best describes the adjusting journal entry required when a company recognizes prepaid insurance expense at the end of an accounting period?

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

Answer: (B)

Verified step by step guidance

1. Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services to be received in the future. In this case, prepaid insurance represents an asset because it provides future economic benefits.
2. Recognize the need for an adjusting journal entry: At the end of the accounting period, the portion of prepaid insurance that has been used or expired must be recognized as an expense. This ensures compliance with the matching principle, which states that expenses should be recognized in the same period as the revenues they help generate.
3. Determine the accounts involved: The adjusting entry will involve reducing the Prepaid Insurance account (an asset) and increasing the Insurance Expense account (an expense). This reflects the consumption of the prepaid insurance during the period.
4. Formulate the journal entry: The adjusting journal entry will debit the Insurance Expense account to record the expense incurred and credit the Prepaid Insurance account to reduce the asset balance.
5. Verify the correct answer: Based on the options provided, the correct adjusting journal entry is 'Debit Insurance Expense; Credit Prepaid Insurance,' as this properly reflects the recognition of the expired portion of prepaid insurance.