Which of the following pre-payments requires an adjusting entry at the end of the year?

which of the following pre-payments requires an adjusting entry at the end of the year?

which of the following pre-payments requires an adjusting entry at the end of the year?

Answer: Among the options provided, “Prepaid Insurance” is the pre-payment that typically requires an adjusting entry at the end of the year.

Prepaid Insurance represents insurance premiums that a company has paid in advance but has not yet used or benefited from during the accounting period. To accurately reflect the company’s financial position and match expenses to the period in which they are incurred (the matching principle in accounting), an adjusting entry is necessary.

At the end of the year, an adjusting entry for Prepaid Insurance is made to:

  1. Reduce the Prepaid Insurance asset (which decreases the balance on the balance sheet) by the amount of insurance that has been “used up” or “expired” during the year. This reflects the portion of the insurance that no longer represents a future benefit.

  2. Recognize an expense on the income statement called “Insurance Expense” for the amount that was “used up” during the year. This expense reflects the cost of insurance coverage for that specific accounting period.

The adjusting entry ensures that the company’s financial statements accurately represent the cost of insurance for the period and the remaining balance of prepaid insurance on the balance sheet. This process aligns with the accrual basis of accounting, which requires recognizing expenses when they are incurred, not just when they are paid. Other prepayments may require adjusting entries as well, depending on the specific nature of the prepaid expenses or assets.