What is the normal balance of the Prepaid Insurance account?

What is the normal balance of the Prepaid Insurance account?

• A. Asset
• B. Debit
• C. Credit
• D. Liability

Answer: (B)

Prepaid Insurance is an asset because it represents a future economic benefit you’ve paid for in advance. Asset accounts increase with debits, so their normal balance sits on the debit side. When you pay for insurance, you debit Prepaid Insurance and credit Cash. As time passes and the insurance is used, you move that cost to Insurance Expense by debiting Insurance Expense and crediting Prepaid Insurance, which reduces the asset. This is why the normal balance for Prepaid Insurance is a debit. The other options don’t fit because the account is not a liability, and the question asks for the side that increases the account (the balance type), which is debit for assets.

Prepaid Insurance is an asset because it represents a future economic benefit you’ve paid for in advance. Asset accounts increase with debits, so their normal balance sits on the debit side. When you pay for insurance, you debit Prepaid Insurance and credit Cash. As time passes and the insurance is used, you move that cost to Insurance Expense by debiting Insurance Expense and crediting Prepaid Insurance, which reduces the asset. This is why the normal balance for Prepaid Insurance is a debit. The other options don’t fit because the account is not a liability, and the question asks for the side that increases the account (the balance type), which is debit for assets.