Any premium paid to insurance company for insurance of fixed assets, cash, group insurance of employees, personal accident insurance of employees, will be booked under insurance expenses account. Insurance premium may be paid in cash or by cheque. Insurance expenses are indirect expenses. Therefore, these expenses are shown in expenditure side of profit and loss account.
Insurance expenses can never be outstanding expenses because the premium is always paid in advance. However, these expenses are always prepaid. That is why, at the time of preparation of balance sheet, the premium not relating to current financial year will be shown as prepaid expenses and reduced from the insurance expenses.
The Accounting Treatment of Insurance Expenses
a) In case of payment of premium in cash or by cheque:-
Entry to be passed
Debit:- Insurance Expenses
Credit:- Cash A/c or Bank A/c
b) In case of prepaid insurance expenses:-
Type of voucher to be prepared:- Journal Voucher
Entry to passed
Debit:- Prepaid Insurance A/c
Prepaid Expenses A/c
Credit:- Insurance Expenses A/c
Treatment of Insurance Expenses in Final Accounts
Being indirect expenses, the insurance expenses should be shown in expense side of profit and loss account. Prepaid insurance expenses will be shown in asset side of the balance sheet.
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