The correct answer is: A prepayment of insurance premium will appear in the Balance Sheet as an asset and in the Insurance Premium account as a debit balance.
An asset is a resource that a company owns and expects to benefit from in the future. A liability is a company’s legal financial debts or obligations that arise during the course of business operations. A debit balance is a balance in an account that shows that the company owes money. A credit balance is a balance in an account that shows that the company has money.
In the case of a prepayment of insurance premium, the company has paid for insurance coverage in advance. This means that the company has an asset, which is the right to receive insurance coverage in the future. The company also has a liability, which is the obligation to pay the insurance premium. The prepayment of insurance premium will be recorded in the Balance Sheet as an asset and in the Insurance Premium account as a debit balance.
Here is a more detailed explanation of each option:
- Option A: A liability and a debit balance. This is incorrect because a prepayment of insurance premium is an asset, not a liability.
- Option B: An asset and a debit balance. This is the correct answer. A prepayment of insurance premium is an asset, and it will be recorded in the Balance Sheet as an asset.
- Option C: An asset and a credit balance. This is incorrect because a prepayment of insurance premium is an asset, and assets are always recorded in the Balance Sheet with a debit balance.
- Option D: A liability and a credit balance. This is incorrect because a prepayment of insurance premium is an asset, and liabilities are always recorded in the Balance Sheet with a credit balance.