Accounting Treatment For Insurance Premium – Learn The Journal Entries For Insurance Premium Income Paid In Advance, Payment, Claim Settlement & Brokerage Fees or Commission
As a business owner who is concerned about the risk of loss, insurance is designed to secure your business against future occurrences that might lead to loss of asset or properties due to an unforeseen event. Hence, you are expected to pay an agreed premium on a monthly or annual basis.
Since the amount calculated as a premium to cover the risk involved is paid to an insurance company prior to the prior covered, you will definitely be wrong if the full figure is expensed to a profit or loss account. In other words, that amount should be treated as prepayment which is a current asset.
Here are accounting entries for insurance premium paid, insurance claim, insurance compensation, insurance premium income and brokerage fees.
Insurance Premium Paid
DR the ‘Insurance Prepaid” account and CR “the bank account with the actual amount paid to the insurance company.
DR the “Insurance Expenses” account and CR “Insurance Prepaid” account with the amount written for the month.
The idea here is that the insurance premium is amortised for the period covered and expenses on a monthly basis till the value is written off to the profit or loss account.
For example, I paid a premium of $100,000 to an insurance company for 10 months. The entry will be DR Insurance Premium and CR bank account. On a monthly basis, I will DR Insurance Expense account and CR Insurance Premium account with $10,000 for the next 10 months to eventually write off the full value.
For Insurance Claim
When there is an actual loss of an asset or inventory, the actuarial calculate what is payable to the customer.
You CR the “Asset or Inventory” account and DR the “Insurance Claim” account with the value of the asset.
When payment is sent to your account, DR the “Bank” account and CR the “Insurance Claim”, then any difference between the asset value or compensation received could either be “gain or loss” which is posted to the income statement.
Insurance Premium Income
This first accounting treatment is applicable to a business owner who is risk-averse. Here, we are looking at an insurance company that receives the payment.
Take the example shared above, DR your bank account and CR Insurance Premium account with the $100,000 received from a customer. The Insurance Premium is no longer an asset (in the case of a customer’s account) but a liability since the owner can call for a claim.
Then at each month passes by, the Insurance Premium is debited while the Premium account, treated as income in the profit or loss account, is credited with $10,000.
Insurance Compensation
Upon payment of claims to the insured to cover the risk suffered, CR the bank account and DR claim settlement account (expenses)
Insurance Brokerage Fees or Commission
The case of brokerage is completely different from the steps mentioned above. An insurance broker connects an insurer to clients for an agreed commission known a brokerage sometimes, he collects the premium on behalf of the insurance firm and remits a portion of the sum paid to the insurance company.
Here are accounting entries for insurance brokers.
For cash received from the insured, DR the bank account and CR liability account with the amount paid as premium. It is believed that a liability arises on every cash collected on behalf of the customer or insured until it’s fully transferred to the insurance company account.
For transfer of cash to the insurance company, CR bank account and DR liability account with the amount paid.
The difference between the premium paid by the insured and amount paid into the insurance company is the brokerage fees, to be debited in liability and credited in the brokerage account (income statement).
Hope you find this accounting treatment for an insurance premium, claims, compensation and brokerage fees useful? Read more tips on accounting treatment for business transactions here