Many businesses have one or more forms of insurance, covering risks such as employee health, liability and property damage. Insurance companies require payment in advance for a specified term of insurance -- monthly, quarterly or annually. Unexpired insurance is the insurance in effect until the coverage you've already prepaid expires. Businesses report this as a current asset on the balance sheet. Any coverage period above one year goes onto the long-term asset section of the balance sheet.
Customarily, a business will prepay one year's worth of insurance instead of making monthly or quarterly premiums. The insurance is a prepaid expense with a term of 12 months. Upon purchase, a business debits the prepaid insurance account for the annual amount and credits the cash account for the same amount. At the close of each month, the company debits the insurance expense account and credits the prepaid insurance account for 1/12th of the annual premium. This reflects the fact that with each passing month, the amount of unexpired insurance declines by 1/12th.
Suppose X Corp. purchases a one-year liability insurance contract for $2,400. It debits the prepaid liability insurance account and credits cash for $2,400. After one month, it books $200 as a debit to the liability insurance expense account and a credit to the prepaid liability insurance account. The $200 comes from dividing $2,400 by 12 months and multiplying the result by one month. The insurance asset balance then becomes $2,200. The unexpired liability insurance covers the remaining 11 months in the year. The cycle repeats each month, reducing the unexpired insurance term by one month.
- AndreyPopov/iStock/Getty Images