A firm which has it's accounting period from January to December insures it's premises for Rs.1200 for a year on 1/4/2013. In this case Rs.1200 has been paid for a period of 12 months and as on 31.12.2013 only 9 months have elapsed. Insurance is still to continue for the next 3 months i.e. up to 31.3.2014. So proportionately Rs.300 out of Rs.1200 is an expense which belongs to next year i.e. 2014. This amount of Rs.300 is called prepaid insurance and is treated as an asset as on 31.12.2013. In Accounting equation it will be shown as under:
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