Insurance Premium Paid Journal Entry
Insurance premium is the amount of money that an individual or company paid to the insurance company to get the insurance service. The customers pay the insurance premium, so they will get the insurance cover over their health, accident, and even life insurance. It depends on the term and conditions of the insurance agreement.
The customers have to pay the insurance premium based on the contract with the insurance company. It will be classified as an expense over the insurance coverage term. However, the insurance term may be different from the company accounting period. So the company will separate it into the monthly expense which allows the company to record the expense based on the monthly insurance.
The company usually pay insurance premium on an annual or semi-annual basis. So it means they pay the insurance premium in advance. It should be classified as the current assets before the service is used. It will be reversed to insurance expense depending on the service usage. The customer will record current assets when they make payment to insurance company. It will be reclassed insurance expenses every month. At the end of insurance period, all of the prepaid insurance will be recorded as an expense.
The insurance premium will be the expense for customer over the insurance coverage. On the other hand, it is the revenue for the insurance company. Both companies must follow the matching principle, they record revenue and expense only when the service is consumed and provided. However, this article will only discuss the insurance premium paid by the customer which is classified as expense for them.
Insurance Premium Paid Journal Entry
When the company signs an insurance contract and makes payment to the insurance provider, we need to record cash out and prepaid insurance.
The journal entry is debiting prepaid insurance and credit cash out.
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | ### | |
| Cash | ### |
Prepaid insurance is the current assets on the balance sheet. This transaction will increase prepaid insurance and decrease cash from balance sheet.
At the end of the month, the company needs to reclass the prepaid insurance to the insurance expense. The amount record will depend on the allocation of annual insurance premiums to a monthly basis.
The journal entry is debiting insurance expense and credit prepaid insurance.
| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | ### | |
| Prepaid Insurance | ### |
The transaction will reduce the prepaid insurance and increase the insurance expense on the income statement.
Insurance Premium Paid Journal Entry Example
ABC is the manufacturer that produces various types of cloth. Management decides to purchase the insurance to cover any accident which may happen and damage the factory.
On 01 June 202X, ABC sign 12 months contract with the insurance company. The insurance premium is $ 120,000 per year.
Please prepare the journal entry for the insurance premium paid.
On 01 June 202X, the company makes a payment of $ 120,000 for the insurance service that will cover 12 months (June 202X-May 202X+1). So ABC does not yet consume the insurance service yet, it is the prepaid expense that will be classified as the current assets.
The journal entry is debiting prepaid insurance $ 120,000 and credit cash $ 120,000.
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | 120,000 | |
| Cash | 120,000 |
The journal entry increases prepaid insurance by $ 120,000 on the balance sheet. Cash is decreased for the same amount.
At the end of June 202X, the company has consumed the insurance service for a month. So they have to reclass the current assets to the expense in order to comply with the accounting matching principle.
Monthly insurance expense = $ 120,000 / 12 months = $ 10,000 per month.
The journal entry is debiting insurance expense $ 10,000 and credit prepaid insurance $ 10,000.
| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | 10,000 | |
| Prepaid Insurance | 10,000 |
It will increase the insurance expense by $ 10,000 on income statement and reduce prepaid expenses from current assets. This transaction needs to repeat every month for another 11 months.
| Month | Beg Prepaid Insurance | Insurance Expense | Ending Prepaid Insurance |
| June 202X | 120,000 | 10,000 | 110,000 |
| July 202X | 110,000 | 10,000 | 100,000 |
| August 202X | 100,000 | 10,000 | 90,000 |
| September 202X | 90,000 | 10,000 | 80,000 |
| October 202X | 80,000 | 10,000 | 70,000 |
| November 202X | 70,000 | 10,000 | 60,000 |
| December 202X | 60,000 | 10,000 | 50,000 |
| January 202X+1 | 50,000 | 10,000 | 40,000 |
| February 202X+1 | 40,000 | 10,000 | 30,000 |
| March 202X+1 | 30,000 | 10,000 | 20,000 |
| April 202X+1 | 20,000 | 10,000 | 10,000 |
| May 202X+1 | 10,000 | 10,000 | 0 |
At the end of the 12th month, the prepaid insurance will decrease to zero on the balance sheet. All of them are recorded as insurance expenses over the period of 12 months.