How do you adjust for prepaid insurance at year-end?

To adjust for prepaid insurance at year-end, the appropriate action involves acknowledging that a portion of the prepaid insurance has now been utilized. This requires transferring the cost of the insurance that has expired from the prepaid insurance account to the insurance expense account.

Debiting the insurance expense account recognizes the expense incurred for the coverage that has been consumed during the accounting period. By doing this, the financial statements reflect an accurate depiction of the company's costs, aligning them with the period in which the coverage was used. Simultaneously, crediting the prepaid insurance account reduces the asset on the balance sheet, acknowledging that not all of the prepaid insurance remains as an asset because some of it has now been expensed.

This process ensures that the matching principle is upheld, where expenses are matched with the revenues they help generate in the same period. Adjusting for prepaid insurance appropriately provides clarity in financial reporting, showing that the company has received value from its insurance payments.