Question

If the premium had been $9,888 for a two-year period, how should the prepaid amount at December 31, 2019, be reported on the balance sheet?

Answer 1

Answer:

The prepaid amount of $4,944 ($9,888/2) should be reported as Prepaid Insurance in the Current Assets side after the Accounts Receivable balance.

Explanation:

Prepaid expense is one of the items adjusted at the end of the accounting period.  The purpose is to remove the prepaid element from the total amount so that only expenses relating to the current period are reported in the current period's income statement.  This is in line with the accrual concept and the matching principle of generally accepted accounting principles.  These require that expenses and revenue are matched to the period under which the expenses are incurred or the revenue earned, and that expenses are matched to the revenues they generated, and vice versa.