A business pays insurance for the next twelve months in advance. Under accrual accounting, the amount relating to future months is initially recorded as:
Correct answer: C. A prepaid expense
- A. An accrued expense
- B. A revenue receipt
- C. A prepaid expense
- D. A capital reserve
Explanation
The future insurance benefit is an asset called prepaid expense until it is used. Only the portion relating to the current period is charged as an expense.
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About Accounting Principles
Accounting principles explain the rules used to record, classify and report business transactions. Coverage includes the accounting equation, double-entry system, accrual and cash bases, matching and prudence concepts, consistency, going concern, business entity, and the difference between capital and revenue items.
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