How to Allocate Insurance Payable in T-Accounting
Proper journal entries help a company maintain orderly books and make the job of financial reporting easier. The T account is a fundamental tool in accounting. It is a visual representation of the book entries required to record debits and credits. In T-accounting, debits appear on the left hand side and credits on the right. In the end, all debits and credits must balance out. For example, if you paid an insurance premium, you debit insurance premium for the dollar amount and credit cash for the same amount. Prepaid insurance, an asset on the balance sheet, reduces cash.
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Instructions
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Create a general ledger account for the business insurance. For example, if your business pays hazard insurance, create a general ledger account labeled, "Hazard Insurance." To make the example more concrete, let's say the premium for Hazard Insurance is $1,500, which is due at the end of the year. Create an Insurance Payable account in your general ledger.
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Debit Hazard Insurance expense for $125 — 1/12 of $1,500 — to record the accrued expense beginning in January. Credit Insurance Payable in the amount of $125. The debit to Hazard Insurance increases the expense and decreases the company's net assets. The credit to Insurance Payable increases the liability on the balance sheet. The journal entry is the same every month.
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Debit Hazard Insurance Payable for the full premium amount of $1,500 for payment of the bill in December. This decreases the liability on the balance sheet. Credit cash for $1,500, which decreases net assets.
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