The portion of the insurance premiums that has expired during the fiscal period is classified as
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A. B. C. D.Explanation
In accordance with the matching rule, the amount of an insurance policy that has expired during the accounting period must be recorded and classified as an expense for the period.
The correct answer is C. an expense.
In insurance, premiums are the amount paid by policyholders to the insurance company in exchange for insurance coverage. These premiums typically cover a specific period, such as a year. However, as time passes, a portion of the premiums "expires" or is considered to have been used up.
When determining the financial results for a fiscal period, it is necessary to recognize the portion of the insurance premiums that has expired during that period. This recognition is done as an expense because it represents the cost associated with providing insurance coverage for that period.
Expenses are recognized in the income statement of a company and are deducted from revenues to calculate net income. By classifying the expired portion of insurance premiums as an expense, the company reflects the reduction in its financial resources due to the cost of providing insurance coverage.
The other answer choices are not correct in this context:
A. An increase in retained earnings: Retained earnings are the cumulative profits of a company that are not distributed to shareholders as dividends. The expired portion of insurance premiums is not directly related to retained earnings.
B. An asset: Assets are economic resources owned or controlled by a company that have future economic value. The expired portion of insurance premiums does not meet the definition of an asset because it represents a cost already incurred and used up, rather than a future economic benefit.
D. A liability: Liabilities are obligations of a company to transfer economic resources or provide services to other entities in the future. The expired portion of insurance premiums is not considered a liability because it does not represent an obligation to transfer economic resources or provide services in the future.
Therefore, the correct classification for the portion of insurance premiums that has expired during the fiscal period is an expense (answer choice C).