Journal Entry for One-Year Insurance Policy

Key Takeaways

• Insurance expense is the cost associated with acquiring an insurance contract and is part of the overhead cost pool.
• The journal entry for insurance expenses involves debiting the insurance expense account and crediting the cash account.
• Prepaid insurance is a current asset on the balance sheet and is used to cover potential losses or damages in the future.
• Prepaid insurance allows businesses and individuals to plan ahead, budget for future risks, and ensure coverage for unexpected losses or damages.

Insurance Expense

Insurance expense is the cost associated with acquiring an insurance contract and is charged to a company’s accounts over a specific period. This expense is part of the overhead cost pool and is allocated to units produced. This means that a portion of the insurance expense is included in the ending inventory and another portion is assigned to units sold. Thus, the insurance expense appears in the cost of goods sold.

When a company incurs an insurance expense for a one-year policy, the journal entry for the expense is a debit to insurance expense and a credit to cash for the amount of the premium. If the insurance is prepaid, it is recorded as an asset on the balance sheet. The insurance expense is then recognized as it is used over the policy period.

Prepaid Insurance

When a payment is made in advance for coverage, this is considered as a current asset on the balance sheet until it is used. This is known as prepaid insurance and is used to cover potential losses or damages in the future.

There are several advantages to using prepaid insurance, including:

1. Lower premiums since the policyholder can pay in advance for coverage.
2. The ability to renew the policy before the expiration date.
3. Protection from unexpected losses or damages.
4. A more accurate estimation of the financial resources needed to cover the insurance policy.

Prepaid insurance is a useful tool for businesses and individuals as it allows them to plan ahead and budget for future risks. It also ensures that policyholders are covered in the event of any unexpected losses or damages. Prepaid insurance is an important consideration for any company or individual looking to protect their financial interests.

Journal Entry for One-year Insurance Policy

Payment of an annual fee in advance can provide coverage for potential losses or damages. This is the concept of prepaid insurance, which is used when an insurance policy is paid for in a single transaction.

A journal entry is required to record the payment for this type of insurance, and the entry will involve both a debit to the prepaid insurance account and a credit to the cash account.

At the end of the year, the insurance expense account must be debited and the prepaid insurance account must be credited in order to record the proper amount of insurance expense for the year.

This journal entry is necessary to ensure that the company is not overstating the amount of insurance coverage they have for the year.

It is important to note that the amount of insurance expense recorded must be the same as the amount that was originally paid.

Conclusion

Conclusion:

At the end of the year, the insurance expense account is debited for the cost of the policy and the prepaid insurance account is credited for the same amount.

This results in a zero net effect on the company’s financial books, as the initial purchase of the policy is matched with the corresponding expense of the insurance policy.

This journal entry is necessary to accurately reflect the company’s financial position and to comply with generally accepted accounting principles.