One of the significant advantages of self-funded plans is prepaid insurance claim transparency. This transparency helps identify cost drivers and allows for data-driven decisions to manage healthcare expenses more effectively. As one can see on each year’s balance sheet, the asset continues to be reported at its $150,000 cost. However, it is also reduced each year by the ever-growing accumulated depreciation.

Accounts Receivable Journal Entries

Sometimes bookkeeping in business, you have to pay for stuff upfront before you even get to use it. We’re talking about expenses like prepaid expenses, which are one of the essential types of adjusting entries in accounting. Think of prepaid rent and prepaid insurance—they’re like the Beyoncé and Jay-Z of the prepaid expenses world. The prepaid insurance will be recorded when the company makes payment to the insurance company. The initial journal entry for a prepaid expense does not affect a company’s financial statements. The initial journal entry for prepaid rent is a debit to prepaid rent and a credit to cash.

Paying Accrued Insurance Expense

For instance, if a premium is received, you will need records such as the payment confirmation and the policy details that connect to the premium. For a complete view of how these entries come together, an amortization schedule is shown below outlining how the prepaid asset balance is reduced, or amortized, throughout the term of the policy. So, if you originally put the repairs against a Repairs & Maintenance expense account, that is the account you will put the insurance proceeds against. Accountingcoach.com has a good example of accounting for payroll withholdings for health insurance. Personal insurance payments are not deductible business expenses so must not go on the Income Statement (Profit and Loss Report).

• Unpaid claims are claims that have been reported but not yet settled.
• Consequently, at the end of the month of January, when the company wants to record the insurance expense for the month, they will need to divide the amount paid ie.
• Prepaid expenses (a.k.a. prepayments) represent payments made for expenses which have not yet been incurred or used.
• This setup ensures that while the employer takes on the risk of paying claims, they are protected from catastrophic losses.
• This comprehensive program offers over 16 hours of expert-led video tutorials, guiding you through the preparation and analysis of income statements, balance sheets, and cash flow statements.
• The initial entry is a debit of $12,000 to the prepaid insurance (asset) account, and a credit of $12,000 to the cash (asset) account.

Prepaid Expenses

• The adjusting entry for prepaid expense will depend upon the initial journal entry, whether it was recorded using the asset method or expense method.
• By accurately recording these liabilities, companies ensure they are prepared for audits and financial reviews.
• Now that we have recorded the payment of the insurance and booked the corresponding prepaid asset account(s), we can amortize the asset over the term of the policy.
• By following these steps, you can be confident that your balance sheet and income statement properly reflect your business operations.
• One might find it necessary to “back in” to the calculation of supplies used.
• Accountingcoach.com has a good example of accounting for payroll withholdings for health insurance.

The initial entry is a debit of $12,000 to the prepaid insurance (asset) account, and a credit of $12,000 to the cash (asset) account. In each successive month for the next twelve months, there should be a journal entry that debits the insurance expense account and credits the prepaid expenses (asset) account. Prepaid insurance is the payment made in advance for future periods of insurance coverage. And you’re treating this as a current asset until the coverage starts and time goes by. When a business pays for insurance in advance, prior to the policy beginning or before the close of the accounting period, the payment includes benefits for future periods.

The amount that was prepaid (rent for February through June) gets Coffee Shop Accounting recorded as an asset in a prepaid rent account. In the previous example, you received an invoice and recorded the $1,000 of unpaid office supplies by crediting accounts payable. In business, you record all transactions (including expenses) using a double-entry accounting system.

• Even though self-funded plans involve variable costs due to fluctuating claims, there are some fixed costs involved.
• This charge should not include any provisions for potential costs beyond the expected annual costs.
• It is acceptable to put money received into an expense account when it makes sense to do so, as it does in this instance.
• It is important that the full amount of the premium be capitalized to the asset account at this stage.
• It is credited to accrued expenses on the liability side of the balance sheet.

If a business were to pay late, it would be at risk of having its insurance coverage terminated. The systematic process of converting the Prepaid Insurance asset into an expense is executed through periodic adjusting entries. This adjustment is necessary because the asset is consumed ratably over the policy’s term as the business receives the benefit of the coverage. Without this step, the balance sheet would overstate assets, and the income statement would understate expenses.

Time Value of Money

Likewise, we can do this by making the amortization of the prepaid insurance with the time period it covers. Later, when a portion of the insurance premium that we have paid has expired each month, we can record the expired cost as an expense on a monthly basis with the amortization of prepaid insurance. By making this journal entry, the company will be able to record the insurance expense which has been incurred already and the part of prepaid insurance which has now already expired. 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. This transaction will increase prepaid insurance and decrease cash from balance sheet.