Accounting for Insurance Payments

Several entries are made in accounting for insurance payments.

When businesses pay insurance premiums, the payment typically covers a one-year period. In order to keep the accounting records accurate, several journal entries are required for insurance premiums.

Deferred Expense

Insurance payments are considered a deferred expense. They are recorded on the books when paid, and as the insurance is used, the books are adjusted accordingly.

Journal Entry

Insurance paid prior to use is considered prepaid insurance. If the insurance bill is $1200 for a year, the entry is recorded by debiting Prepaid Insurance for $100 and crediting the Cash account for $100. The amount is $100 because $1200 divided by twelve months yields $100 per month.

Prepaid Insurance

Prepaid Insurance is an asset account. Prepaid premiums are recorded as assets until the insurance is used or expires.

Expired Insurance

At the end of each month, an entry is made to adjust the Prepaid Insurance account to reflect the expired insurance for that particular month. The amount used each month is transferred from an asset account into an expense account.

Adjusting Entry

At the end of each month an adjusting entry is made by debiting Insurance Expense $100 and crediting Prepaid Insurance $100. This is done for twelve months until all insurance is used.

References

• Quick MBA: Adjusting Entries