Prepaid expenses are another type of adjusting entry Annabelle and Sarah encounter during the accounting cycle.

Consider insurance, for example. For Rover's Sake pays for its business insurance on a quarterly basis, which means they pay every 3 months. The amount they pay for Nov. 1, for example, will service November, December, and January.

For Rover's Sake's accounting cycle ends on Dec. 31, so how does Annabelle and Sarah show the cost of the organization's business insurance?

First, they need to figure out the monthly cost. Say for example that the insurance costs $1200 for 3 months. Even though For Rover's Sake pays the entire $1200 on Nov. 1, they're really paying $400 a month.

When recording an adjusting entry, Annabelle and Sarah deduct the used portion of the Prepaid Insurance account and add it to the Insurance Expenses account. In this case, that means when the cycle closes on Dec. 31, they record adjusting entries to deduct $800 from the Prepaid Insurance account and add it to the Insurance Expenses account.

The remaining Prepaid Insurance account balance would be entered into the balance sheet debit column, whereas the new Insurance Expenses account balance would be entered in the Income Statement debit column (Scott, 2018).

Now it's your turn to help Annabelle and Sarah calculate the adjusting entry.

For Rover's Sake pays $3,638.42 for an umbrella insurance policy that runs from April 1, 2019 through April 1, 2020.

The end of the accounting cycle approaches--Dec. 31, 2019. The Insurance Expenses account already has a balance of $13,571.49, and now Annabelle and Sarah need to enter adjusting entries for the umbrella policy.

What will be the final adjusted balance for the Insurance Expenses account, to be entered in the debit column of the Income Statement? Round to the nearest dollar.

Next, describe what process you used to calculate the adjusted balance and this amount would impact the general ledger.