Prepaid Insurance is recorded as which type of account?

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

Answer: (B)

Prepaid Insurance is an asset because paying for insurance in advance creates a future economic benefit—the company has a right to protection in future periods. When you pay, you record it as a current asset (Prepaid Insurance) on the balance sheet rather than an expense. As each period passes and the insurance coverage is used, that portion of the asset is expensed, typically by debiting Insurance Expense and crediting Prepaid Insurance, reflecting the consumption of the prepaid benefit. It isn’t a liability, since there is no unpaid obligation, and it isn’t revenue or an expense at the time of payment. (If the coverage extends beyond a year, the portion beyond one year would be a long-term asset, with the within-year portion classified as a current asset.)