Question

Prepaid insurance has an opening balance of Rs. 10,000. During the accounting year, one fifth expired. The adjustment entry would require a credit of _______.
1. Rs. 20,000 to Prepaid insurance account
2. Rs. 8,000 to insurance expense account
3. Rs. 2,000 to Prepaid insurance account
4. Rs. 2,000 to insurance expense account

Answer 1

Correct Answer - Option 3 : Rs. 2,000 to Prepaid insurance account

The correct answer is Rs. 2,000 to a Prepaid insurance account.

• Prepaid Insurance: Prepaid insurance includes the amount of insurance premium which is paid in advance pertaining to the next financial year.
• Prepaid Insurance is an asset of the business and thus has a Debit balance in the ledger account.

• Prepaid Insurance account has an opening balance of Rs. 10,000 that denotes the amount of insurance premium paid in excess during the previous year pertaining to the current year.
• One-fifth of the Prepaid Insurance (Rs. 2000) has expired, which represents that amount of insurance that is used up in the current year as an Insurance expense. This results in a decrease in prepaid insurance balance.
• To decrease prepaid insurance, its account must be credited. So, the adjustment entry would require a credit of Rs. 2,000 to Prepaid insurance account.