Debits and Credits: In-Depth Explanation with Examples

is insurance expense a debit or credit

An allowance granted to a customer who had purchased merchandise with a pricing error or other problem not involving the return of goods. If the customer purchased on credit, a sales allowance will involve a debit to Sales Allowances and a credit to Accounts Receivable. A balance on the right side (credit side) of an account in the general ledger. The accounting term that means an entry will be made on the left side of an account. When you join PRO Plus, you will receive lifetime access to all of our premium materials, as well as 13 different Certificates of Achievement.

Types of Bookkeeping Accounts Used To Organize Income and Expenses

is insurance expense a debit or credit

An insurer or insurance company undertakes specific risks thereby protecting the business from possible losses. XYZ company needs to pay its employee liability insurance for the fiscal year ending December 31, 2018, which amounted to $10,000. The company has paid $10,000 of the insurance premium for the entire year at the beginning of the first quarter. FastTrack company buys one-year insurance for its delivery truck and pays $1200 for Accounting For Architects the same on December 1, 2017. Now that the company has prepaid for services to be used, it is classified as an asset. The above journal is only used when the business pays for the owner’s personal insurance out of the business bank account.

is insurance expense a debit or credit

How is Sales Tax Calculated

  • These include commercial property cover, product liability cover and employee cover.
  • Now that the company has prepaid for services to be used, it is classified as an asset.
  • The 5 main types of accounts are assets, expenses, revenue (income), liabilities, and equity.
  • Accounts Receivable is an asset account and is increased with a debit; Service Revenues is increased with a credit.
  • Location and usage of the vehicle can also affect the premium, as well as the gender, age, and marital status of the drivers.
  • Companies simply have exchanged cash for the right to certain insurance coverage in the future.
  • The most important thing to remember is that when you’re recording journal entries, your total debits must equal your total credits.

Let us look at the balance sheet at the end retained earnings balance sheet of one month on December 31, 2017. I am sure if the Accountant wants to change anything, adjusting journals can be done. But in the meantime, these entries will keep the books looking good. I recommend checking with your client’s tax accountant because of the complexities around high value assets and costly damages. The example is a bill of $1,000 for General Liability insurance and then two payments of $84. This journal would be used if your business has paid or will be paying a contractor to repair something.

Factors that Affect Insurance Expenses

is insurance expense a debit or credit

Also assume that the company prepares monthly financial statements. When the $2,400 payment is made on January 1, the company debits Prepaid Insurance and credits Cash. It also sets up is insurance expense a debit or credit automatic monthly adjusting entries to debit Insurance Expense for $200 and to credit Prepaid Insurance for $200 on the last day of each month.

is insurance expense a debit or credit

Depending on the length of the insurance purchased each time, companies may record the insurance for uses over multiple accounting periods. 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. This means positive values for assets and expenses are debited and negative balances are credited. For example, upon the receipt of $1,000 cash, a journal entry would include a debit of $1,000 to the cash account in the balance sheet, because cash is increasing. Expired insurance during a period is recorded as an insurance expense for the same period.

is insurance expense a debit or credit

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