On February 2, Miles Inc. pays $800 to purchase a one-year insurance policy that will expire next year on January 31. Miles indicates this transaction in its books by recording an $800 reduction in cash and an $800 increase in expenses. Did Miles make the proper accounting entries? Why or why not?

a. No, Miles did not make the proper accounting entries. Prepaid insurance is an asset, not an expense. Thus, the firm should have offset the $800 decrease in cash (an asset account) with an $800 increase in prepaid insurance (also an asset account).

b. Yes, Miles made the proper accounting entries. In order to keep the accounting equation in balance, the firm had to increase its expenses and thus decrease its stockholders' equity by the same amount as it decreased its assets.

c. No, Miles did not make the proper accounting entries. Prepaid insurance is a liability, not an expense. Thus, the firm should have offset the $800 decrease in cash (an asset account) with an $800 increase in prepaid insurance (a liability account).

d. No, Miles did not make the proper accounting entries. Prepaid insurance is a liability, not an expense. Thus, the firm should have offset the $800 decrease in cash (an asset account) with an $800 decrease in prepaid insurance (a liability account).