Question

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?.

Answer 1

If on february 2, miles inc. Pays $800 to purchase a one-year insurance policy. No miles did not  make the proper accounting entries.

What is insurance policy?

Insurance policy can be defined as a coverage that help to cover cost incase of unforeseen circumstance.

Based on the scenario mile did not makes the proper accounting entries based on the following:

• Prepaid insurance is not an expense but an asset.
• Hence, the company should have offset the decrease in cash of the amount of $800 and  $800 increase in prepaid insurance into an asset account.

Therefore miles did not  make the proper accounting entries.

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