Wilson Company paid $4,900 for a 4-month insurance premium in advance on November 1, with coverage beginning on that date. The balance in the prepaid insurance account before adjustment at the end of the year is $4,900, and no adjustments had been made previously. The adjusting entry required on December 31 is:

December 31

Insurance expense        2450 Dr

    Prepaid Insurance         2450 Cr

Explanation:

Under the accrual or matching principle, we are required to match the revenues with expenses and record them in the period to which they relate to. Thus the prepaid insurance that relates to the period ending December 31 and has been consumer should be recorded as insurance expense in that period. So, we make the above adjusting entry.

The insurance expense for 2 months is = 4900 * 2/4 = 2450

So, we record 2450 as insurance expense for the year at 31 December and reduce the account of prepaid insurance by this amount