Prepaid Insurance is classified as an which type of account?

• A. Asset
• B. Liability
• C. Revenue
• D. Expense

Answer: (A)

Prepaid Insurance is an asset because it represents a payment made in advance for insurance coverage you will receive in the future. Since the service hasn’t been used yet, the benefit belongs to you and is recorded on the balance sheet as a prepayment (an asset). As time passes and the insurance coverage is used, you gradually convert that asset into an expense by recognizing Insurance Expense and reducing the asset accordingly. It isn’t a liability, because there’s no remaining obligation you must pay; it isn’t revenue, because it isn’t income earned by the business; and it isn’t an expense now, because the cost is recognized later when the insurance coverage is consumed.