In a classified balance sheet, current (short-term) and non-current (long-term) assets and liabilities are presented separately. In most cases current assets and liabilities are easy to distinguish and don’t present any issues with their classification and presentation on a balance sheet. However, there are certain items which may require special treatment because they need to be separated into the current and non-current portions. In the first part of this article we will discuss one of such items: prepaid insurance.

Short and long-term classification of certain assets and liabilities (Part I)

2. Current and non-current portions of prepaid assets

As was mentioned earlier, the prepaid expenses balance consists of a premium paid in advance for insurance coverage. The following information pertains to the insurance:

Policy start date	8/1/20X3
Policy end date	7/31/20X6
Coverage period	3 years
Premium	$144
Premium payment date	8/1/20X3

The policy covers three (3) years or 36 months. A portion of the prepaid insurance is recognized as insurance expense every month. The monthly expense is $4 = $144 ÷ 36 months. As this policy provides coverage over more than a year from the end of the current fiscal year (12/31/20X3), only the portion of prepaid insurance that will be recognized as insurance expense over the next year (12 months) after 12/31/20X3 is considered current. The remainder is a non-current portion and should not be included in current assets on the balance sheet.

The following schedule shows the allocation (expending) of prepaid insurance over the policy coverage period:

Date	Month	Insurance Expense	Prepaid Insurance
Aug 20X3	0	$0	$144
Aug 20X3	1	4	140
Sep 20X3	2	4	136
Oct 20X3	3	4	132
Nov 20X3	4	4	128
Dec 20X3	5	4	124
Jan 20X4	6	4	120
Feb 20X4	7	4	116
Mar 20X4	8	4	112
Apr 20X4	9	4	108
May 20X4	10	4	104
Jun 20X4	11	4	100
Jul 20X4	12	4	96
Aug 20X4	13	4	92
Sep 20X4	14	4	88
Oct 20X4	15	4	84
Nov 20X4	16	4	80
Dec 20X4	17	4	76
Jan 20X5	18	4	72
Feb 20X5	19	4	68
Mar 20X5	20	4	64
Apr 20X5	21	4	60
May 20X5	22	4	56
Jun 20X5	23	4	52
Jul 20X5	24	4	48
Aug 20X5	25	4	44
Sep 20X5	26	4	40
Oct 20X5	27	4	36
Nov 20X5	28	4	32
Dec 20X5	29	4	28
Jan 20X6	30	4	24
Feb 20X6	31	4	20
Mar 20X6	32	4	16
Apr 20X6	33	4	12
May 20X6	34	4	8
Jun 20X6	35	4	4
Jul 20X6	36	4	0
Total		144

We can see in the table that the prepaid insurance balance started with $144 when the premium was paid in August 20X3. By the end of 20X3, $20 (i.e., $4 x 5 months) had been recognized as insurance expense leaving a prepaid insurance balance of $124 (this balance is highlighted in light blue in the table above).

The amount of insurance expense to be recognized over the following 12 months is $48 (i.e., $4 x 12 months), and these amounts are highlighted in light orange. The $48 is the current portion of the prepaid insurance balance because it will be amortized (i.e., “used”) within the next 12 months (i.e., from Jan to Dec 20X4).

The insurance expense to be recognized after that (after Dec 20X4) equals $76 (i.e., $4 x 19 months), and these monthly expenses are highlighted in light green in the table. These amounts represent the non-current (long-term) portion of the prepaid insurance balance because they will not be amortized (i.e., “used’) within the 12 months after the end of the current fiscal year. So, the $76 should be presented as a non-current asset on the balance sheet.

To summarize, based on the discussion above, the 12/31/20X3 prepaid balance of $124 should be split into the current portion (i.e., $48) and non-current portion (i.e., $76) and an adjustment should be made on the balance sheet.

The balance sheet with this adjustment is presented below. Note that a new element is now shown on the balance sheet for the long-term portion of the prepaid insurance balance. This element is presented after the property, plant and equipment line and is titled Other Assets (highlighted in yellow on the balance sheet below):

Friends Company Consolidated Balance Sheet as of December 31, 20X3
ASSETS
Current assets:
Cash and cash equivalents	$ 3,300
Accounts receivable	2,900
Inventories	2,600
Prepaid expenses	48
Total current assets	8,848
Property, plant and equipment:
Buildings	5,000
Machinery, equipment	8,720
Less: Allowance for depreciation	(5,500)
Property, plant and equipment (net)	8,220
Other assets	76
Total assets	17,144
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable	1,600
Accrued expenses	1,200
Income taxes payable	900
Deferred rents	153
Total current liabilities	3,853
Long-term note payable	3,953
Stockholder's equity:
Common stock	1,000
Paid-in capital	1,850
Retained earnings	6,488
Total stockholder's equity	9,338
Total liabilities and stockholder's equity	17,144

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