A company incurs expenses when attempting to generate profits. Insurance expense is common in business as companies use it to mitigate risk. Many types of insurance policies are available in business. General liability, life, vehicle, employee or other types of insurance may be under a company’s operating umbrella. In accounting, expenses carry a natural debit balance.
Insurance Expense Accounts
Insurance expense accounts fall under a larger group known as income statement accounts. Debits increase expense accounts and credits decrease them. As companies incur insurance expenses, they debit insurance expense and credit cash for premiums paid. In the traditional T account, insurance expense has a debit balance listed on the left side of the account.
Many companies will often purchase insurance policies for a specific time period, such as six or 12 months. When this occurs, companies must report the insurance policy as a prepaid asset because the policy has value for longer than the month in which the company purchased the policy. Companies debit a prepaid insurance account and credit either cash or a payables account. As an asset, prepaid insurance also carries a natural debit balance.
Under the two previously outlined cases, insurance purchases are either an asset use transaction or an asset exchange transaction. A use transaction decreases assets (cash) and increases total expenses for a period (insurance expense). An asset exchange transaction simply swaps one asset for another -- in this case, cash for prepaid insurance.
Credits only appear in one of two instances in insurance transactions. First, it appears as a correction for errors or to record refunds in the insurance expense account. In the second instance, it appears for the purpose of reducing the amount of prepaid insurance reported on a company’s general ledger. Otherwise, insurance expense is always a debit.