Question

An insurance premium of $1,500 is paid for insurance coverage for the following year. The payment is recorded as an expense in the month of purchase. This violates the __________ principle of accounting.

Answer 1

Answer:

Matching principle

Explanation:

The matching principle in accounting states that the income  for a period should be matched together to the expenses incurred to generate them.

For example, the insurance premium paid for was meant to cover the following year consumption, hence it is a prepaid expense and should be recognized and treated as an asset at the end of the current year.

Further more, such asset would later be recognized as an expense in the following year when the insurance service would have been consumed.

This violates the matching principle of accounting.