An adjusting entry for a prepaid expense involves which of the following?

• A. Debit Prepaid Insurance, Credit Cash.
• B. Debit Prepaid Insurance, Credit Insurance Expense.
• C. Debit Prepaid Insurance, Credit Depreciation.
• D. Debit Insurance Expense, Credit Prepaid Insurance.

Answer: (D)

In adjusting prepaid expenses, you move the portion of the prepaid asset that has been used into an expense. Prepaid Insurance is an asset because payment was made in advance for future coverage. As time passes, part of that coverage is consumed, so you recognize it as an expense and reduce the asset accordingly. The correct entry is to debit Insurance Expense to record the cost incurred during the period and credit Prepaid Insurance to decrease the asset.

Why the other approaches don’t fit: debiting Prepaid Insurance and crediting Cash would record an additional payment and increase the asset rather than recognize the expense; debiting Prepaid Insurance and crediting Insurance Expense would increase the asset and reduce the expense, the opposite of what has actually happened; and debiting Prepaid Insurance and crediting Depreciation misapplies the idea of depreciation to a prepaid expense.