An increase in prepaid insurance is subtracted from net income because

a. it includes the impact of increasing cash and increasing net income.
b. the company paid additional premiums this period in excess of the insurance expense recorded on the income statement.
c. insurance expense decreased net income; however, cash was not paid. The prepaid insurance account was decreased rather than cash.

Question

12-12-2022
Business

contestada

An increase in prepaid insurance is subtracted from net income because

a. it includes the impact of increasing cash and increasing net income.
b. the company paid additional premiums this period in excess of the insurance expense recorded on the income statement.
c. insurance expense decreased net income; however, cash was not paid. The prepaid insurance account was decreased rather than cash.

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smecloudbird18 smecloudbird18 · Answer 1 · 2022-12-17T03:47:10+01:00

An increase in prepaid insurance is subtracted from net income because insurance expense decreased net income; however, cash was not paid. The prepaid insurance account was decreased rather than cash.

Prepaid expenses are not initially recorded on an income statement. It is recognised on the account income statement. When paid, prepaid insurance premiums are deductible as long as they do not apply to a period that extends more than 12 months after the end of the taxable year in which they were made. If the insurance contract is for a longer period of time, the deduction must be taken over time. The prepayment is recorded as an asset on the company's balance sheet.

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