Terminology

• When a company buys an insurance policy in advance, exchanging cash for some kind of insurance coverage, it is called prepaid insurance. It is considered an asset to the company, the value of which is reduced as the company receives the benefit of the coverage. All types of insurance policies must be bought for a predetermined period of time, including vehicle, property and liability coverage.
  
  

Accounting

• Prepaid insurance is recorded as an asset on the balance sheet. On a general ledger, prepaid insurance increases with a debit and decreases with a credit On the income statement, prepaid insurance is expensed incrementally, and is usually recorded as an Interest Expense.
  
  

Purpose

• Businesses prepay for insurance to make sure the company is covered in case of property damage, worker injury or other unfortunate circumstance. Although it can be expensive, the cost is worthwhile for a business, because the total price of the premium is usually much lower than the cost of any claim against the business.