Question

Which one of the Entries below will be included in the Journal Entry to record the following transaction; Our Business paid $3,000 cash for Insurance for the next 3 months. Debit to Prepaid Insurance $3,000 Credit to Insurance Expense $3,000, Credit to Insurance Liability $3,000 Debit to Insurance Expense $3.000 Debit to Cash $3,000

Answer 1

1. Whenever any cash is paid for the expense which is required to be incurred in future, we wil treat it as prepaid expense which means the expense which is already paid in advance but is not used up or not have been expired.

In the present case, Business has paid $3,000 cash for insurance for the next 3 months. It means $3,000 have been paid for the expense which is not have been incurred yet and yet to be incurred in future.

Journal entry for prepaid expense:

Account name	Debit	Credit
Prepaid Insurance	$3,000
Cash		$3,000
(Prepaid insurance charges paid)

Right answer is Debit to Insurance Expenses $3,000.

2. Basic definition of Closing an Account is to Reset the Balance to Zero.

Clsoing an Account is done thorugh closing entries where entries are passed at year end to reset the account balance of temporary accounts to zero. Temporary accounts balances moves to the permanent accounts showed in the balance sheet. Temporary accounts are the accounts which are shown in the general ledger which records transactions over a particular accounting period.