Introduction
Well, how many of you are aware of the double entry system of bookkeeping while firms and enterprises maintain their accounts for the company?
The double-entry bookkeeping system authenticates the account-keeping system for maintaining the accounts and financial transactions of corporate firms, enterprises, etc.
A credit entry is given for every incoming transaction, say an influx of cash for the business entity. And, for every outflow of a monetary transaction, say outgoing expenses, you have a debit entry that is given.
The books of accounts are tallied against the given debit and credit entries. And, at the end of the year, companies prepare trial balances, cash budget sheets, P&L accounts, and balance sheets.
This way, a firm or the company determines if profits or losses are made for the year and how the company has grown every quarter. The figures are then shared between shareholders, investors, and other stakeholders who would want to know how far a company has grown.
Shareholders would want to know how much profit have earned for a quarter so that they can invest further in your firm. A client would look at the books of accounts to ensure that they can do business with you.
Therefore, books of accounts provide a tangible picture of how your company has grown over the years.
On this parlance, we are going to cover the blog topic ‘Is Insurance Debit or Credit? We would provide insights into whether insurance is treated as an income or expense to be entered into books of accounts.
Helping you get started further:
Insurance Premium Payment
When your company makes an insurance payment in the form of premium remittance, you can have corresponding debit and credit entries as the transaction is entered in a double entry system of booking keeping.
Let us look at how the entry can be treated as a debit entry and how is it entered in the books of accounts as a credit entry.
A- As a Debit entry
Whenever an insurance premium is paid, this is recorded as a debit entry in your trial balance books. This indicates that is company is involved in the utilization of a service over a period of time.
An insurance premium amount is paid by a company to protect the firm against business losses or provide coverage for the health of employees.
The premium amounts however must be paid from the company’s books of accounts to an insurance service provider and the payments must be done from time to time.
B- As a Credit Entry
A corresponding credit entry would be done to a cash account or bank account. Most of the firms make net transfer payments to the service provider of the insurance company.
C- Workings of the same
Suppose an insurance firm is paid an insurance premium to the tune of $1000 by your company personnel:
- Debit Insurance Expense = $1000
- Credit Cash/ Bank Account= $1000
In a double-entry system of book keeping, every debit entry should find a corresponding credit entry to enter in the books of accounts.
Here, the debit reflects as an expense incurred for your company while the credit entry indicates a reduction of your cash balance by that extent.
Insurance As an Asset or Prepaid Insurance
You may want to pay the premium amount for insurance over the period of 12 months at the beginning of the financial year itself. In this case, you prepay your insurance premiums for the entire year instead of making the payment month on month.
In other words, here, the insurance payment is done in advance covering a future period of time. From the company’s perspective, it can be treated as a prepaid asset while the monthly payouts are amortized or pre-calculated to enter in your monthly books of accounts or to show the expense on your trial balance books.
Let us see how the entries are done:
A- As a Prepaid Asset Account- Debit entry
A debit entry is created as a Prepaid Asset Account. In this case, it is Prepaid insurance that is being talked about here.
B- Credit Entry
You have to create a corresponding credit entry as Cash or bank account. In this case, the cash or the bank account is decreased to the extent the actual payout is being made.
Notes: You debit an insurance expense to recognize the cost of usage over a current period while you consider prepaid insurance as an asset mainly because you would want to reduce the asset value as and when it is consumed.
C- Workings as applicable
Suppose, your company or firm is making an annual prepaid insurance of $1200 covering the insurance premium for the whole lot of 12 months in the year, this is how the entries are initially created by your book-keeper:
- Debit Prepaid Insurance= $1200
- Credit Cash/ Bank = $1200
When you want to amortize the payout on a month-on-month basis, this is how the entries would look like:
- Debit: Insurance Expense = $100 <1200/12>
- Credit: Cash/Bank Account= $100
Insurance Claims- Reimbursements or Receivables
When your firm or enterprise has to receive a claim from an insurance service provider, how would the entries be treated in the books of accounts?
Let us have a run-down with respect to the scenario as Debit or Credit accounts along with a worked-out example of the same:
A- As a Debit Entry
As the amount is a sum that is to be received by your firm or company, this is treated as an Asset or a receivable entry for you. In this case, the asset is recorded as an insurance Receivable as a Debit entry account.
- Debit Insurance Receivable- Here, you mention the amount of money the insurance firm owes you or your firm as such.
B- As a Credit Entry
Here, the income you expect or receive from a service provider is treated as an income you would be anticipating. You must give a credit entry with respect to the same.
- Credit- Insurance Receivable Account
C- Workings for the same as an example or illustration
Suppose you make a claim of $5000 in lieu of a fire insurance policy or employment wages act, this is how the figure gets represented as Debit and Credit entries inside your books of accounts.
- Debit Insurance Receivable Account= $5500
- Credit Insurance Income = $5,500
The Bottom Line
In a nutshell, you can conclude that an insurance premium remittance is considered an expense if the premium amount is remitted on a monthly basis.
When you prepay the entire insurance premium that covers the entire financial year, then it is treated as a prepaid asset in your books of accounts.
Finally, when you might anticipate a claim money to be received from an insurance company, then it is treated as an Income received or Insurance receivable account.
What are your thoughts on this? Do mention it in the comments below!
Frequently Asked Questions or FAQs
How are entries treated in the books of accounts?
Answer: You treat a regular payment as an expense account and this amount gets recorded as an expense account. For an increase in the value of an asset, the account is entered as an Accounts receivable entry. When you pay to a service provider as a consolidated bill, then the expense is recorded as an accounts payable entry.
Are financial statements typically recorded in the company?
Answer: Yes, the financial statements like cash budgets, trial balances, Profit and loss accounts and balance sheets are prepared by the Finance and Accounts team to indicate how well a company is performing for the year. The stocks or inventory levels improve if the financial standing of the company remains good.
This way, shareholders purchase more shares of the company and the firm gets listed on stock exchanges, and the operations affect the supply chain management of enterprises too.
