Another possibility is to classify general liability insurance as a risk management expense. This is because the insurance protects the business from liability, and the cost of the What Is Insurance Expense? insurance is directly related to the risk of liability. Insurance expense is the amount that a company pays to get an insurance contract and any additional premium payments.

Is insurance expense an income?

Insurance expense will be one of the categories that your income statement lists as an expenditure. Because the income statement reflects business activity over a period of time, this line on your income statement will aggregate any insurance payments your business made during the period that the statement covers.

In most cases, the goal is to get them paid by the end of the current period to avoid additional late charges or being dropped by the insurance company altogether. One possibility is to classify general liability insurance as an operating expense. This is because the insurance is necessary for the business to continue operating, and the cost of the insurance is directly related to the business’s operations. This expense category is typically used for ongoing and necessary expenses, such as rent, utilities, and payroll.

Recording Unemployment Tax on a Balance Sheet

When they aren’t used up or expired, these payments show up on an insurance company’s balance sheet. The policies are intended to cover not only its property and products but also to protect its workers. Unexpired premiums should be listed as prepaid insurance, which is listed in an asset account. A prepaid insurance expense is the amount of premiums paid for insurance that are recorded in the balance sheet as assets at the time of payment because coverage has not started yet. As soon as coverage begins, a portion of the amount is recorded as expense until each payment is used up and these assets are eventually turned into expenses.

What Is Insurance Expense?

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. 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. The expense ratio can hence be used to compare companies and analyze a company’s performance over time. An expense ratio under 100% signifies that the insurance company is either earning or writing more premiums than it is paying out in expenses to generate or support these premiums.

Insurance Expenses in Accounting

Nearly all businesses will face some type of insurance expense in order to protect their operations in the event of unforeseen adverse events. Insurance payable is a liability that records any unpaid premiums which the company owes. Some insurers prefer that insured parties pay on a prepaid schedule such as auto or medical insurance. Your balance sheet is a summary of how much your business owns and how much it owes on a particular date.

This insurance expense will show up on your balance sheet as part of a lower bank balance; however nothing on the balance sheet specifically will indicate that you spent the missing money on insurance. An income statement portrays the specifics of how your business arrived at the financial situation reflected on your balance sheet. While the balance sheet loans shows your financial position at a specific moment in time, your income statement shows your financial activity over a more extended period, such as a month or a year.

Example of Prepaid Insurance

It is divided into a column or section that reflects assets and another column or section that reflects liabilities. Each of these columns or sections is further broken down into categories. The cost of insurance is recorded https://kelleysbookkeeping.com/what-is-a-reasonable-cause-of-late-s-corp-filing/ as an expense in the period in which it has been used. To ensure that sufficient time has passed in the fiscal year to allocate costs incurred during the year, the processing of these charges typically occurs in March.

  • Your balance sheet shows how much money you have, and that amount is contingent on how much you’ve earned and how much you’ve spent.
  • A prepaid expense is an expenditure that a business or individual pays for before using it.
  • While the balance sheet loans shows your financial position at a specific moment in time, your income statement shows your financial activity over a more extended period, such as a month or a year.
  • However, most companies can deduct such expenses on their income tax forms in order to get a tax break.

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. Insurance expense and insurance payable are two different things, yet they are interrelated. There would be no need for an insurance payable account if there were no insurance expense. The good news for companies about such types of insurance is that they can be deducted from tax liability as a business expense. However, most companies can deduct such expenses on their income tax forms in order to get a tax break. For insurance policies that protect a manufacturer’s production functions, the expense will be allocated to the cost of production, where it will be divided by the number of units manufactured.