Accounting Fundamentals Certification (AFC) Practice Test

Prepaid Insurance is classified as an asset account because it represents a payment made in advance for insurance coverage that has not yet been consumed or utilized. When a company pays for insurance coverage ahead of time, it recognizes this payment as an asset on the balance sheet, as it provides future economic benefits. As time passes and the insurance coverage is used, the prepaid insurance amount is gradually expensed, transitioning it from an asset to an expense. This reflects the matching principle in accounting, where expenses are recognized in the same period as the revenues they help generate. The prepaid insurance thus serves as a resource that will benefit the company over time until it is expensed.