Accounting Fundamentals Certification (AFC) 2025 – 400 Free Practice Questions to Pass the Exam

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What type of account is Prepaid Insurance?

Liability

Asset

Prepaid Insurance is classified as an asset because it represents a payment made in advance for insurance coverage that will benefit the company over a future period. When a business pays for insurance premiums upfront, it does not receive the full benefit of that payment immediately; instead, the coverage extends over time. Therefore, the amount paid is recorded as an asset on the balance sheet, reflecting the future economic benefit the company expects to receive as it consumes the insurance coverage over subsequent months or years.

As the coverage period progresses, the prepaid amount is gradually recognized as an expense in the income statement, aligning the cost with the period in which the related benefits are realized. This practice follows the matching principle in accounting, ensuring that expenses are recorded in the same period as the revenues they help generate.

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Owner's Equity

Revenue

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