Introduction

Effectively managing insurance payments and claims in a business's financial records is crucial for precise bookkeeping and financial reports. Basic insurance journal entries typically involve debiting insurance expenses and crediting the bank for payments made to an insurance company for business insurance. However, not all insurance premiums qualify as deductible business expenses, and their classification can vary, requiring placement on either the Profit and Loss Report or the Balance Sheet. This detailed guide examines different types of insurance, their corresponding journal entries, and answers frequently asked questions from bookkeepers and business owners.

Types of Insurance and Their Journal Entries

Insurance Expense Journal Entry

An insurance expense arises when a business acquires coverage from an insurance provider, resulting in an annual premium payment, either upfront or in periodic installments. The journal entry for such a transaction is:

• Debit: Insurance Expense (expense account)
• Credit: Cash/Bank (asset account)

Business Insurance Types and Their Entries

General Liability Insurance: Also known as public liability insurance, it covers financial losses due to property damage, injuries, medical costs, and lawsuits. Journal entry:

• Debit: Insurance Expense (expense account)
• Credit: Cash/Bank (asset account)

Professional Liability Insurance: Suited for service-providing businesses, this insurance protects against losses from errors or negligence. Journal entry:

• Debit: Insurance Expense (expense account)
• Credit: Cash/Bank (asset account)

Other Insurances: Includes covers for commercial property, product liability, and employees. The journal entry is consistent with the above.

Motor Vehicle Insurance: For businesses with motor vehicles, insurance coverage, grouped with expenses like fuel and repairs, is necessary. The journal entry is:

• Debit: Motor Vehicle Expenses (expense account)
• Credit: Cash/Bank (asset account)

Bookkeeping software can help track specific vehicle costs via sub-accounts under the Motor Vehicle expense category:

• Motor Vehicle Expenses (Main account)
• Gas/Fuel
• Vehicle Insurance
• Vehicle Repairs & Maintenance

For sole proprietors using personal vehicles for business, insurance types depend on usage. Personal vehicle insurance often falls short for business purposes, necessitating commercial auto insurance. The journal entry for personal vehicle insurance paid by the business is:

• Debit: Drawings (equity account)
• Credit: Cash/Bank (asset account)

Deductible business use portion:

• Debit: Motor Vehicle Expense (expense account)
• Credit: Capital (equity account)

Personal Insurance for Business Owners

Business owners may have personal insurance types like life, health, income protection, trauma, and disability. If the business pays for these through its account, the entry is:

• Debit: Drawings (equity account)
• Credit: Cash/Bank (asset account)

If repayment occurs, the entries split into:

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

Payroll withholdings for health insurance require both withholding and payment entries. For example:

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

When personal insurance proceeds, such as life insurance, are deposited into the business account:

• Debit: Cash/Bank (asset account)
• Credit: Capital (equity account)

If funds are withdrawn for personal use:

• Debit: Drawings (equity account)
• Credit: Cash/Bank (asset account)

When a business receives insurance proceeds for damages, entries vary based on the nature of proceeds:

Repair or replacement:

• Debit: Cash/Bank (asset account)
• Credit: Other Income (income account)

If proceeds cover repair expenses directly:

• Debit: Cash/Bank (asset account)
• Credit: Repairs & Maintenance (expense account)

Motor Vehicle Proceeds

For repair proceeds:

• Debit: Cash/Bank (asset account)
• Credit: Motor Vehicle Repairs or Vehicle Insurance (expense account)

Accounts Payable and Insurance

When receiving a bill:

• Debit: Insurance Expense (expense account)
• Credit: Accounts Payable (liability account)

Paying the bill:

• Debit: Accounts Payable (liability account)
• Credit: Cash/Bank (asset account)

Example Scenarios and Solutions

Question 1: Employee Damages Property
An employee causes damage to company property with a vehicle. Post-repair costs are reimbursed through the employee's insurance check:

• 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. Entries for damages, compensations, and repairs include:

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 lower than the insurance check, the excess is noted as income:

• Debit: Cash/Bank (asset account)
• Credit: Damage (liability account) and Insurance Gain (income account)

Conclusion

Comprehending and accurately capturing insurance-related transactions is vital for a business's fiscal well-being. This guide offers a robust examination of insurance types, their journal entries, and solutions to commonplace challenges faced by bookkeepers and business owners. By adhering to these principles, businesses can guarantee precise financial records, ensuring they align with accounting standards and facilitating informed financial decisions and reporting.