When would a prepaid insurance asset have a credit balance?
There’s a couple of different reasons why a prepaid insurance asset account might have a credit balance.
For example, let’s say company insurance has to pay $1,000 every three months. As a result the company decides to debit the prepaid insurance when the amount is paid quarterly. It also prepares an automatic monthly adjusting entry to debit the insurance expense that would be about $333.33, and then they would credit the prepaid insurance for $333.33. If the first of the $333.33 payments is debited to the insurance expense before the prepaid insurance gets debited for the new quarter then the monthly adjusting entry would cause the balance in the prepaid insurance account to become a credit balance.
Another situation where you might create a credit balance in your prepaid insurance account could happen if a company simply fails to pay their insurance premium in a timely manner. The monthly adjusting entry causes the prepaid insurance to become a credit balance. So, essentially, even if you haven’t made payment, but you still have the automatically credit the prepaid insurance that’s a way to create your credit balance on a prepaid insurance asset account. The prepaid insurance account must report the true amount that is prepaid but yet not expired as of the day of the balance sheet.
If nothing is prepaid, then the prepaid insurance account must be a zero balance. If a insurance premium is owing to the insurance company then there would be a liability account with a credit balance for the amount owed as of the balance sheet date. Whatever the cause of the credit balance in the prepaid insurance account, the account needs to be switched to a liability or zeroed out by making payment before issuing a balance sheet.