At the end of an accounting period, adjustments must be made to reflect the portion of the asset that has been consumed during the period. The amount of asset or prepaid expense consumed is recorded as a debit to the expense account, and a credit to the asset account. Should an adjusting entry not be made, expenses, net income, owner's equity and assets would all be overstated.
The amount of a prepaid asset to be expensed over its expected life can be expressed:
Value of the prepaid asset/Time (months or years) = Amount expensed
For example, insurance was prepaid for the next four years for $ 26,000. The insurance expense for a year would be $ 6,500 ($26,000/ 4 years), or $ 541.67 per month ($26,000/48 months). The
corresponding adjusting entry is:
| Account | Debit | Credit |
| Insurance expense | $ 6,500 | |
| Prepaid insurance | $ 6,500 |
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