Prepaid Insurance
Categories: Insurance
When you prepay something, you can usually expect to get a discount. Why? Risk. That is, you've taken away credit risk from the seller of the insurance, i.e. the risk you won't pay. And you've also given them your capital early, so that they can go invest it, or use it for nunchuck purchases, or whatever they want to do with your dough. It's a Thing because it's an asset that accountants track.
You've paid $300,000 for 5 years' worth of insurance on your factory in advance. Then, for each of the 20 quarters you operate, the accountant will amortize 15 grand in asset value away from that prepaid insurance, taking it off the balance sheet and running it through as an expense on the income statement. And they'll tell you to pick up the banana peels lying all over the floor.
