Prepaid insurance

Prepaid Insurance

A specific type of prepaid expense representing insurance premiums paid in advance, recorded as a current asset and systematically allocated to expense over the coverage period.

For example, a company that pays $24,000 for a two-year liability insurance policy would initially record the full amount as prepaid insurance, then recognize $1,000 of insurance expense each month as the policy term passes.

Prepaid insurance represents a future benefit (insurance coverage) that has been paid for but not yet received. At each financial reporting date, the portion covering the unexpired term remains as an asset, while the portion relating to the expired term is recognized as an expense.