What type of account is Prepaid Insurance considered?

Prepaid Insurance is classified as an asset because it represents a payment made in advance for insurance coverage that will be utilized over time. When a business pays for insurance coverage at the beginning of a policy period, it acquires a benefit that extends into future periods. This payment is recorded on the balance sheet as a current asset because it is expected to provide future economic benefits, specifically the coverage it provides until the policy expires.

As time passes and the insurance coverage is used, a portion of the prepaid insurance will be adjusted to an expense, reflecting the cost of coverage consumed during that period. However, until that time, it remains an asset, representing resources owned by the business that will provide future value. This is essential for accurately reporting the company’s financial position and ensuring that expenses are recognized in the periods in which they are incurred.