Meaning of Paid Insurance Premium Journal Entry: Format & Examples

Prepaid insurance is an asset account on the balance sheet, in which its normal balance is on the debit side. The company should not record the advance payment as the insurance expense immediately. This is due to, under the accrual basis of accounting, the expense should only be recorded when it occurs. The company pays the insurance fees in advance, it cannot record it as an expense yet.

Personal Insurance Business Owner

For example, a magazine publisher may sell a multi-year subscription and collect the full payment at or near the beginning of the subscription period. Such payments received in advance are initially recorded as a debit to Cash and a credit to Unearned Revenue. Unearned revenue is reported as a liability, reflecting the company’s obligation to deliver product in the future. Remember, revenue cannot be recognized in the income statement until the earnings process is complete. In ACCA, especially under Financial Accounting (FA) and Strategic Business Reporting Legal E-Billing (SBR), students must understand the classification and presentation of expenses.

Prepaid Expenses Guide: Accounting, Examples, Journal Entries, and More Explained

Understanding this initial step is important for anyone managing a company’s books or preparing its tax documentation. You expense some of the prepaid insurance each month or period once it passes. Based on the transaction value, calculate the exact amounts for the debit and credit entries. Accuracy here is non-negotiable, as even small errors can propagate through financial statements. Only when we are confident that an insurance claim will be approved, and it is probable, we can account for it in the book.

Recording the Initial Cash Payment

The proper timing of this entry is a hallmark of high-quality financial reporting. For instance, a policy purchased on March 1st requires an adjustment on March 31st, April 30th, and so on, until the following February 28th. This diligent, periodic adjustment enforces the matching principle and prevents material misstatements of earnings. Hence, you make a payment of ₹18,000 to the insurer on 1st March for a policy with tenure of 6 months.

Once again I have entered an example into the free bookkeeping software called Manager.

Paid Insurance Premium Journal Entry ACCA Questions

The $1,000 debit shows that your total office supplies expenses increased by $1,000. The $1,000 credit to the cash account represents the money leaving your business’s bank account. You credit your cash account to record money leaving the business if you’ve paid for the expense. But if you have yet to pay for the expense, you credit accounts payable to show the money you owe. All 12 months from Jan’20 to Dec’20 will be charged in each period against the prepaid expense account to reduce the prepaid insurance prepaid account to zero by end of the year.

Flexible Health Insurance Options

• Assume $200 of supplies in a storage room are physically counted at the end of the period.
• Self-funded plans offer a blend of flexibility, control, and potential cost savings, making them an attractive option for many employers.
• So, you thought handling your business finances would be as simple as keeping track of your coffee expenses?
• But understanding how much you spend is just as important as knowing how much money you make.
• It’s recorded on financial reporting documents, like balance sheets and income statements.
• Now, as each month rolls by and some of that insurance coverage is used up, you’ll need to adjust your accounts accordingly.

So when it comes to entering these transactions into the bookkeeping records of a business there are different journal entries to consider. The ACA has specific reporting rules for companies with 50 or more employees, known as Applicable Large Employers (ALEs). You must file Form 1095-C for each employee and Form 1094-C gross vs net to the IRS, including copies of all the 1095-Cs.

For example, if the total monthly premium is $1,000, and the employee pays $200, the $200 is a plan asset. Even though the $1,000 might be in an account under the employer’s name and EIN, the $200 must be treated with fiduciary responsibility. Understanding these regulations helps ensure your self-funded health insurance plan is compliant, protecting both your company and your employees from potential legal and financial risks. This means the company is responsible for paying employees’ medical claims directly.