Insurance Expense Overview, Types, Insurance Payable

Insurance Expense Overview, Types, Insurance Payable

But others, such as products liability and some workers compensation claims, may be settled long after the policy has expired. The most difficult to assess are loss reserves for events that have already happened but have not been reported to the insurance company, known as “incurred but not reported” (IBNR). Examples of IBNR losses are cases where workers inhaled asbestos fibers but did not file a claim until their illness was diagnosed 20 or 30 years later. Actuarial estimates of the amounts that will be paid on outstanding claims must be made so that profit on the business can be calculated. Insurers estimate claims costs, including IBNR claims, based on their experience. Reserves are adjusted, with a corresponding impact on earnings, in subsequent years as each case develops and more details become known.

  • However, insurance is not a traditional asset like stocks or bonds that generate income or appreciate in value over time.
  • If you are covering a risk which you hardly experience, you will end up paying for premiums but not utilizing them in any way.
  • Insurance is a contract between an individual and an insurance company, which provides financial protection to the individual in case of unforeseen events.
  • It is recorded on a company’s balance sheet as a current asset and is typically used to cover expenses related to property and casualty insurance.
  • The payment of the insurance expense is similar to money in the bank—as that money is used up, it is withdrawn from the account in each month or accounting period.

This is accomplished with a debit of $1,000 to Insurance Expense and a credit of $1,000 to Prepaid Insurance. This same adjusting entry will be prepared at the end of each of the next 11 months. At the end of each month, an adjusting entry of $400 will be recorded to debit Insurance Expense and credit Prepaid Insurance. DateAccountNotesDebitCreditX/XX/XXXXExpenseXPrepaid ExpenseXLet’s say you prepay six month’s worth of rent, which adds up to $6,000.

When the full amount is received by the insurer, accounting will treat the payment as an asset. An entry will then be created on the books to move this amount from current assets to the expense side. The leftover ($16,000 in this case) will be counted as prepaid insurance for the insurer. Naturally, the leftover will still be counted as an asset on the balance sheet, with the understanding that the full amount will be used up by the end of the six-month term. Each journal entry requires a debit to Insurance Expenses and a credit to Prepaid Expenses. On December 31, an adjusting entry will show a debit insurance expense for $400—the amount that expired or one-sixth of $2,400—and will credit prepaid insurance for $400.

Situations where Insurance is not a liability but an asset

Insurance is a way to protect you and your property from various risks. It is primarily the protection of your financial interests in the event of an insured event. It is clear that insurance will not help to avoid accidents, natural disasters, illnesses, but thanks to it, you will be able to cover the losses. By applying the relevant premium rates and additional premiums, the insurance expense for Anthony’s medical plan can be determined. The second largest asset category for property/casualty companies, preferred and common stocks, is valued at market price. Life insurance companies generally hold a small percentage of their assets in preferred or common stock.

  • Premiums have not been fully “earned” by the insurance company until the policy expires.
  • All insurance policies become an asset once the plan matures — that is, you have paid for it and are credited with a lump sum.
  • Insurance expenses qualify as nonrecurring as they arise annually or even less frequently.

When this occurs, part of the insurance expense will be listed in ending inventory, and some of it will be listed under cost of goods sold (COGS). In accounting, every financial transaction is recorded by two entries on the company’s books. These two transactions are called a “debit” and a “credit,” and together, they form the foundation of modern accounting. For example, assume ABC Company purchases insurance for the upcoming twelve month period. ABC Company will initially book the full $120,000 as a debit to prepaid insurance, an asset on the balance sheet, and a credit to cash. Journal entries that recognize expenses related to previously recorded prepaids are called adjusting entries.

Understanding Insurance Expense

When someone purchases prepaid insurance, the contract generally covers a period of time in the future. For instance, many auto insurance companies operate under prepaid schedules, so insured parties pay their full premiums for a 12-month period before the coverage actually starts. The same applies to many medical insurance companies—they prefer being paid upfront before they begin coverage. A business spends $12,000 in advance for liability insurance coverage for the next twelve months. The company records this expenditure in the prepaid expense account as a current asset.


This means that the debit balance in prepaid insurance on December 31 will be $2,000. This translates to five months of insurance that has not yet expired times $400 per month or five-sixths of the $2,400 insurance premium cost. Cash is the most liquid asset, meaning it can be easily converted into other assets or used to pay expenses. Insurance policies, on the other hand, provide a form of protection against financial loss. Life insurance policies, for example, pay out a death benefit to the policyholder’s beneficiaries in the event of their death.

On top of this, if you surrender the policy before it matures, all benefits will be forfeited. Once you sign up for insurance, including endowment policies, ensure you see it to its maturity in order to reap the full benefits and allow it to potentially become an asset. The business has paid for the insurance policy for 1 year ahead on May 1st.

Elements of the Income Statement

However, it can become a cost if the policy expenses exceed its benefits. Insurance offers financial protection and can be a tax deduction, providing peace of mind. Sales is a revenue not an expense or asset while difference
between sales and expense is profit which is liability for
business. Supplies expense is neither an asset nor a liability it is an
expense. Prepaid supplies would be an example of an asset and as
the supplies are used they become expenses, supplies expense.

The company would reduce this account by the amount it pays the insurance company, simultaneously crediting its cash account. Now, both the business and the insurance company have obligations before each other. Insurance expense plays a crucial role in providing financial protection and security for businesses the many benefits of a 401 and individuals. Remember to regularly review coverage, compare quotes, and implement risk mitigation strategies to ensure adequate protection and cost-effective insurance solutions. Health insurance is not considered a current asset, as it does not have a tangible value that can be readily converted to cash.

Credits & Deductions

This is why doing a proper analysis of the policies is necessary before making a decision. It can appreciate in value over time, but also comes with expenses such as mortgage payments, property taxes, and maintenance costs. Investments, such as stocks, bonds, mutual funds, and retirement accounts, are also considered assets. However, they also come with risks and fees that must be considered when creating a financial plan. If the retailer has incurred some insurance expense but has not yet paid the premiums, the retailer should debit Insurance Expense and credit Insurance Premiums Payable.

While insurance does not have a tangible value, it can be a valuable tool to protect against financial risks. In conclusion, insurance can be considered an asset in certain situations. It provides a form of protection against potential financial losses, which can be valuable to individuals and businesses alike. However, insurance is not a traditional asset like stocks or bonds that generate income or appreciate in value over time. Insurance expense is the cost incurred to provide insurance coverage.

The prepaid amount will be reported on the balance sheet after inventory and could part of an item described as prepaid expenses. As the amount of prepaid insurance expires, the expired portion is moved from the current asset account Prepaid Insurance to the income statement account Insurance Expense. This is usually done at the end of each accounting period through an adjusting entry. Each month, an adjusting entry will be made to expense $10,000 (1/12 of the prepaid amount) to the income statement through a credit to prepaid insurance and a debit to insurance expense. In the twelfth month, the final $10,000 will be fully expensed and the prepaid account will be zero. According to generally accepted accounting principles (GAAP), expenses should be recorded in the same accounting period as the benefit generated from the related asset.

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