Examples of How to Record a Journal Entry for Expenses

GVG Company acquired a six-month insurance coverage for its properties on September 1, 2021 for a total of $6,000. In the illustration for insurance, the adjustment was applied at the end of December, but the rent adjustment occurred petty cash at the end of March. What was not stated in the first illustration was an assumption that financial statements were only being prepared at the end of the year, in which case the adjustments were only needed at that time.

Prepaid Insurance Journal Entry US CPA Questions

• In this case, the total value of your payroll gets recorded in the payroll expense account.
• In this blog we will dive into how we account for prepaid insurance with an example.
• By making this entry, companies align their revenue recognition with the period in which the coverage is provided.
• With self-funded plans, you maintain control over plan design and can adapt quickly to changing healthcare needs.
• The dollars recorded is the ammount of insurance expense for the month.
• Passing adjustment entries to balance the books of accounts is often helpful, preventing one from making an entry for new business transactions.
• The journal entry increases prepaid insurance by $ 120,000 on the balance sheet.

This accounting process restarts every payroll cycle when new employee premiums are withheld. Each cycle, you need to ensure that the employee portion is accounted for first, maintaining compliance with ERISA rules. In addition to unpaid claims, companies must estimate the cost of incurred but not reported (IBNR) claims. These are claims that have occurred but have not yet been reported to the company. Estimating IBNR claims requires a robust estimation process, often involving actuaries. Self-funded plans offer a blend of flexibility, control, and potential cost savings, making them an attractive option for many employers.

The Role of Journal Entries in Insurance Accounting

• The second journal entry shows how 1/12th of this amount is charged to expense in the first month of the coverage period.
• So, we must record every insurance payment carefully using a correct journal entry.
• At the end of the year, “Prepaid Insurance” would have a balance of $2,250 and “Insurance Expense” would be at $750.
• The journal entries below act as a quick reference for accounting for insurance proceeds.
• Unexpected events can impact the financial stability of the business.
• However, the insurance company may require the customers to pay in advance.

Of the total six-month insurance amounting to $6,000 ($1,000 per month), the insurance for 4 months has already expired. In the entry above, we are actually transferring $4,000 from the asset to the expense account (i.e., from Prepaid Insurance to Insurance Expense). Keep in mind that the trial balance introduced in the previous chapter was prepared before considering adjusting entries. Subsequent to the adjustment process, another trial balance can be prepared. This adjusted trial balance demonstrates the equality of debits and credits after recording adjusting entries. Therefore, correct financial statements can be prepared directly from the adjusted trial balance.

accounting made sense

As the coverage period advances, a portion of the premiums becomes ‘earned’. This needs to be recorded over time, transitioning from a liability in deferred premium accounts to actual insurance income. More often than not, insurance may cover only a portion of the total loss. But in some instances, insurance proceeds can be more than the loss incurred, which would result in a gain.

• For a fuller explanation of journal entries, view our examples section.
• Prepaid expenses represent expenditures that have not yet been recorded by a company as an expense, but have been paid for in advance.
• If you use an expense account, the P&L will show a huge loss in one month (from the damage) and then a huge profit in the month that the insurance check is received.
• The same principle applies to other prepaid costs such as rent or subscriptions.
• In this case, Prepaid Insurance is classified as current assets on the Balance Sheet, as shown below.

While this might sound risky, it gives employers the flexibility to design a plan that meets their specific needs. In preparing the adjusting entry, our goal is to transfer the used part from the asset initially recorded into expense – for us to arrive at the proper balances shown in the illustration prepaid insurance above. The preceding discussion of adjustments has been presented in great detail because it is imperative to grasp the underlying income measurement principles. Perhaps the single most important element of accounting judgment is to develop an appreciation for the correct measurement of revenues and expenses.

• You are recognizing your monthly expense and the extent of your obligation.
• This monthly adjustment continues for the entire 12-month term of the policy.
• When the insurance period begins, you slowly transfer a portion of the amount from the asset account to the expense account.
• Let’s see how we initially book the prepaid insurance and subsequently record our expense and amortize the prepaid account.
• The balance will be reversed from prepaid insurance to expense on the income statement.
• This is accomplished with a debit of $1,000 to Insurance Expense and a credit of $1,000 to Prepaid Insurance.

After 12 such entries, the Prepaid Insurance account will have a zero balance, and the full $1,200 will have been recognized as Insurance Expense. The adjusting entry is a non-cash transaction, meaning it has no effect on the Cash account. The existence of this asset is mandated by the matching principle, a foundational concept in accrual accounting.

Yes, you can treat the account as utilizing employee contributions first. This means that when accounting, you assume the employee contributions are the first funds used for paying claims or premiums. This method aligns with fiduciary obligations under ERISA, ensuring that employee contributions are used appropriately and transparently. By accurately recording these liabilities, companies ensure they are prepared for audits and financial reviews. This practice also helps in maintaining a clear picture of the company’s financial health.

The mechanics of accounting for prepaid expenses and unearned revenues can be carried out in several ways. The expenditure was initially recorded into a prepaid account on the balance sheet. The alternative approach is the “income statement approach,” wherein the Expense account is debited at the time of purchase. The appropriate end-of-period adjusting entry establishes the Prepaid Expense account with a debit for the amount relating to future Legal E-Billing periods.