Question

cincinnati supply, co. is a local supplier to the kraft heinz company, which is the third - largest food and beverage company in north america and the fifth - largest food and beverage company in the world. on november 15, cincinnati supply, co. paid $2,500 cash for a 5 - month insurance policy. the coverage begins on december 1. given the choices below, determine the general journal entry that cincinnati supply, co. will make to record this transaction.
prepaid insurance 2,500
cash 2,500
insurance expense 2,500
prepaid insurance 2,500
cash 2,500
insurance expense 2,500
insurance expense 2,500
cash 2,500
cash 2,500
prepaid insurance 2,500

Explanation:

When a company pays for insurance in advance (pre - paid), it creates an asset called Prepaid Insurance. Cash is an asset that decreases when paid out. Debiting Prepaid Insurance increases the asset, and crediting Cash decreases the asset. The insurance expense will be recognized over the period of coverage, not at the time of payment.

Answer:

Prepaid Insurance 2,500
Cash 2,500