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On February $2,$ Miles Inc. pays $$800$ to purchase a one$-$year insurance policy that will expire next year on January $31.$ Miles indicates this transaction in its books by recording an $$800$ reduction in cash and an $$800$ increase in expenses. Did Miles make the proper accounting entries? Why or why not?

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Yes, Miles made the proper accounting entries. In order to keep the accounting equation in balance, the firm had to increase its expenses and thus decrease its stockholders' equity by the same amount as it decreased its assets.

No$,$ Miles did not make the proper accounting entries. Prepaid insurance is a liability, not an expense. Thus, the firm should have offset the $$800$ decrease in cash $($an asset account$)$ with an $$800$ increase in prepaid insurance $($a liability account$).$

No$,$ Miles did not make the proper accounting entries. Prepaid insurance is an asset, not an expense. Thus, the firm should have offset the $$800$ decrease in cash $($an asset account$)$ with an $$800$ increase in prepaid insurance $($also an asset account$).$

No$,$ Miles did not make the proper accounting entries. Prepaid insurance is a liability, not an expense. Thus, the firm should have offset the $$800$ decrease in cash $($an asset account$)$ with an $$800$ decrease in prepaid insurance $($a liability account$).$

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