Trusted by 1L+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 1L+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below
Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below
Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Insurance Journal Entries
Insurance Journal Entries
Introduction
Managing insurance payments and claims in the financial records of a business is essential for accurate bookkeeping and financial reporting. A basic insurance journal entry involves debiting the insurance expense and crediting the bank for payments made to an insurance company for business insurance. However, not all insurance payments (premiums) are deductible business expenses, and the classification of these expenses can vary. Some insurance payments should be recorded on the Profit and Loss Report, while others must be placed on the Balance Sheet. This comprehensive guide explores various types of insurance, their respective journal entries, and answers to common questions from bookkeepers and business owners.
Types of Insurance and Their Journal Entries
Insurance Expense Journal Entry
An insurance expense arises when a small business signs up with an insurance provider to receive coverage. The provider charges an annual fee, known as a premium, which can be paid upfront or in installments (monthly or fortnightly). The journal entry for this transaction is:
Debit: Insurance Expense (expense account)
Credit: Cash/Bank (asset account)
Business Insurance Types and Entries
General Liability Insurance
General liability insurance, also known as public liability insurance, protects against financial losses resulting from property damage, injuries to people, medical costs, lawsuits, and more. The journal entry is:
Debit: Insurance Expense (expense account)
Credit: Cash/Bank (asset account)
Professional Liability Insurance
Also referred to as professional indemnity insurance, this type of insurance is suited for businesses providing services. It protects against financial losses due to errors or negligence. The journal entry is:
Debit: Insurance Expense (expense account)
Credit: Cash/Bank (asset account)
Other Insurances
These include commercial property cover, product liability cover, and employee cover. The journal entry for these insurances is the same as above.
Motor Vehicle Insurance
A business that owns motor vehicles needs insurance coverage for those vehicles. This insurance is usually grouped with other motor vehicle expenses like fuel and repairs in the accounting records. The journal entry is:
Debit: Motor Vehicle Expenses (expense account)
Credit: Cash/Bank (asset account)
With bookkeeping software, bookkeepers can open sub-accounts under the Motor Vehicle expense account for better tracking:
Motor Vehicle Expenses (Main expense account)
Gas/Fuel
Vehicle Insurance
Vehicle Repairs & Maintenance
For sole proprietors or traders using personal vehicles for business, the type of insurance depends on the activity. Personal vehicle insurance may not cover business use, requiring commercial auto insurance. The journal entry for personal vehicle insurance paid out of the business account is:
Debit: Drawings (equity account)
Credit: Cash/Bank (asset account)
The deductible portion for business use is:
Debit: Motor Vehicle Expense (expense account)
Credit: Capital (equity account)
Personal Insurance for Business Owners
Business owners might have personal insurances such as life insurance, health insurance, income protection, trauma, and disability. When the business pays for the owner’s personal insurance from the business bank account, the journal entry is:
Debit: Drawings (equity account)
Credit: Cash/Bank (asset account)
If the owner repays the business, the entries are:
Business Payment:
Debit: Drawings (equity account)
Credit: Cash/Bank (asset account)
Owner Repayment:
Debit: Cash/Bank (asset account)
Credit: Capital (equity account)
Employee Health Insurance
Accounting for payroll withholdings for health insurance involves entries for both withholding and payment. For instance:
Employee Withholding:
Credit: Insurance Expense (expense account)
Debit: Insurance Expense (expense account)
Payment to Provider:
Credit: Employee Withholdings Insurance (liability account)
Debit: Employee Withholdings Insurance (liability account)
Insurance Journal Entry for Proceeds
Individual or Business Owner Proceeds
When personal insurance proceeds (like life insurance) are deposited into the business account, the entry is:
Debit: Cash/Bank (asset account)
Credit: Capital (equity account)
If the money is withdrawn for personal use, the entry is:
Debit: Drawings (equity account)
Credit: Cash/Bank (asset account)
Business Insurance Proceeds
When a business receives insurance proceeds for damages, the entry depends on the nature of the proceeds. For example, if the proceeds are for repair or replacement:
Debit: Cash/Bank (asset account)
Credit: Other Income (income account)
Alternatively, if proceeds are used to cover repair expenses directly:
Debit: Cash/Bank (asset account)
Credit: Repairs & Maintenance (expense account)
Motor Vehicle Proceeds
For motor vehicle repair proceeds:
Debit: Cash/Bank (asset account)
Credit: Motor Vehicle Repairs or Vehicle Insurance (expense account)
Accounts Payable and Insurance
Receiving the Bill
When an insurance bill is received:
Debit: Insurance Expense (expense account)
Credit: Accounts Payable (liability account)
Paying the Bill
When the bill is paid:
Debit: Accounts Payable (liability account)
Credit: Cash/Bank (asset account)
Example Scenarios and Solutions
Question 1: Employee Damages Property
An employee damages company property with her car. The business pays for repairs, and the employee reimburses the business with her insurance check. The reimbursement should offset the original repair expense:
Debit: Cash/Bank (asset account)
Credit: Repairs & Maintenance (expense account)
Question 2: Property Management Company
A property management company receives an insurance check for water damage repairs. The entries are:
Damage:
Debit: Damage (liability account)
Credit: Buildings (asset account)
Insurance Check:
Debit: Cash/Bank (asset account)
Credit: Damage (liability account)
Repairs:
Debit: Buildings (asset account)
Credit: Cash/Bank (asset account)
If repair costs are less than the insurance check, the difference is recorded as income:
Debit: Cash/Bank (asset account)
Credit: Damage (liability account) and Insurance Gain (income account)
Conclusion
Understanding and accurately recording insurance transactions is crucial for maintaining the financial health of a business. This guide provides a comprehensive overview of various insurance types, their journal entries, and practical solutions to common scenarios faced by bookkeepers and business owners. By following these guidelines, businesses can ensure their financial records are precise and compliant with accounting standards, ultimately aiding in better financial decision-making and reporting.
Introduction
Managing insurance payments and claims in the financial records of a business is essential for accurate bookkeeping and financial reporting. A basic insurance journal entry involves debiting the insurance expense and crediting the bank for payments made to an insurance company for business insurance. However, not all insurance payments (premiums) are deductible business expenses, and the classification of these expenses can vary. Some insurance payments should be recorded on the Profit and Loss Report, while others must be placed on the Balance Sheet. This comprehensive guide explores various types of insurance, their respective journal entries, and answers to common questions from bookkeepers and business owners.
Types of Insurance and Their Journal Entries
Insurance Expense Journal Entry
An insurance expense arises when a small business signs up with an insurance provider to receive coverage. The provider charges an annual fee, known as a premium, which can be paid upfront or in installments (monthly or fortnightly). The journal entry for this transaction is:
Debit: Insurance Expense (expense account)
Credit: Cash/Bank (asset account)
Business Insurance Types and Entries
General Liability Insurance
General liability insurance, also known as public liability insurance, protects against financial losses resulting from property damage, injuries to people, medical costs, lawsuits, and more. The journal entry is:
Debit: Insurance Expense (expense account)
Credit: Cash/Bank (asset account)
Professional Liability Insurance
Also referred to as professional indemnity insurance, this type of insurance is suited for businesses providing services. It protects against financial losses due to errors or negligence. The journal entry is:
Debit: Insurance Expense (expense account)
Credit: Cash/Bank (asset account)
Other Insurances
These include commercial property cover, product liability cover, and employee cover. The journal entry for these insurances is the same as above.
Motor Vehicle Insurance
A business that owns motor vehicles needs insurance coverage for those vehicles. This insurance is usually grouped with other motor vehicle expenses like fuel and repairs in the accounting records. The journal entry is:
Debit: Motor Vehicle Expenses (expense account)
Credit: Cash/Bank (asset account)
With bookkeeping software, bookkeepers can open sub-accounts under the Motor Vehicle expense account for better tracking:
Motor Vehicle Expenses (Main expense account)
Gas/Fuel
Vehicle Insurance
Vehicle Repairs & Maintenance
For sole proprietors or traders using personal vehicles for business, the type of insurance depends on the activity. Personal vehicle insurance may not cover business use, requiring commercial auto insurance. The journal entry for personal vehicle insurance paid out of the business account is:
Debit: Drawings (equity account)
Credit: Cash/Bank (asset account)
The deductible portion for business use is:
Debit: Motor Vehicle Expense (expense account)
Credit: Capital (equity account)
Personal Insurance for Business Owners
Business owners might have personal insurances such as life insurance, health insurance, income protection, trauma, and disability. When the business pays for the owner’s personal insurance from the business bank account, the journal entry is:
Debit: Drawings (equity account)
Credit: Cash/Bank (asset account)
If the owner repays the business, the entries are:
Business Payment:
Debit: Drawings (equity account)
Credit: Cash/Bank (asset account)
Owner Repayment:
Debit: Cash/Bank (asset account)
Credit: Capital (equity account)
Employee Health Insurance
Accounting for payroll withholdings for health insurance involves entries for both withholding and payment. For instance:
Employee Withholding:
Credit: Insurance Expense (expense account)
Debit: Insurance Expense (expense account)
Payment to Provider:
Credit: Employee Withholdings Insurance (liability account)
Debit: Employee Withholdings Insurance (liability account)
Insurance Journal Entry for Proceeds
Individual or Business Owner Proceeds
When personal insurance proceeds (like life insurance) are deposited into the business account, the entry is:
Debit: Cash/Bank (asset account)
Credit: Capital (equity account)
If the money is withdrawn for personal use, the entry is:
Debit: Drawings (equity account)
Credit: Cash/Bank (asset account)
Business Insurance Proceeds
When a business receives insurance proceeds for damages, the entry depends on the nature of the proceeds. For example, if the proceeds are for repair or replacement:
Debit: Cash/Bank (asset account)
Credit: Other Income (income account)
Alternatively, if proceeds are used to cover repair expenses directly:
Debit: Cash/Bank (asset account)
Credit: Repairs & Maintenance (expense account)
Motor Vehicle Proceeds
For motor vehicle repair proceeds:
Debit: Cash/Bank (asset account)
Credit: Motor Vehicle Repairs or Vehicle Insurance (expense account)
Accounts Payable and Insurance
Receiving the Bill
When an insurance bill is received:
Debit: Insurance Expense (expense account)
Credit: Accounts Payable (liability account)
Paying the Bill
When the bill is paid:
Debit: Accounts Payable (liability account)
Credit: Cash/Bank (asset account)
Example Scenarios and Solutions
Question 1: Employee Damages Property
An employee damages company property with her car. The business pays for repairs, and the employee reimburses the business with her insurance check. The reimbursement should offset the original repair expense:
Debit: Cash/Bank (asset account)
Credit: Repairs & Maintenance (expense account)
Question 2: Property Management Company
A property management company receives an insurance check for water damage repairs. The entries are:
Damage:
Debit: Damage (liability account)
Credit: Buildings (asset account)
Insurance Check:
Debit: Cash/Bank (asset account)
Credit: Damage (liability account)
Repairs:
Debit: Buildings (asset account)
Credit: Cash/Bank (asset account)
If repair costs are less than the insurance check, the difference is recorded as income:
Debit: Cash/Bank (asset account)
Credit: Damage (liability account) and Insurance Gain (income account)
Conclusion
Understanding and accurately recording insurance transactions is crucial for maintaining the financial health of a business. This guide provides a comprehensive overview of various insurance types, their journal entries, and practical solutions to common scenarios faced by bookkeepers and business owners. By following these guidelines, businesses can ensure their financial records are precise and compliant with accounting standards, ultimately aiding in better financial decision-making and reporting.
Author
Share with your friends
Help you friends in learning more about personal finance by share this blog.
Help you friends in learning
more about personal finance
by share this blog.
Help you friends in learning more about personal
finance by share this blog.
Silimar Blogs
Axis Bank Credit Card Net Banking
Axis Bank Credit Card Net Banking
August 5, 2024
PNB Fixed Deposit (FD) Interest Rates
PNB Fixed Deposit (FD) Interest Rates
August 5, 2024
Linking Aadhaar to Your Punjab National Bank Account
Linking Aadhaar to Your Punjab National Bank Account
August 5, 2024
PNB SIP Calculator
PNB SIP Calculator
August 5, 2024
How to Close a PNB Account Online & Offline?
How to Close a PNB Account Online & Offline?
August 5, 2024
TDS Refund - How to Claim TDS Refund
TDS Refund - How to Claim TDS Refund
August 5, 2024
View More
Download App
Explore More
Managing assets totalling over 1 crore+