Is Insurance Expense An Asset? What Is Its Treatment In Accounting
Is Insurance Expense An Asset?
Insurance expense is an expense/cost that businesses pay for securing their day-to-day operations and for unseen or incidental events. Insurance can be an asset of a business if it is paid in advance or it is prepaid insurance. In this case, the business did not use the cost of insurance but pays it in advance then the business records it as an asset in the balance sheet and removes it when it is fully used.
Insurance expenses that pay in advance are recorded as followings:
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | xxx | |
| Cash | xxx |
If a business uses accrual bases accounting then insurance expense is the cost of insurance that a business already used but has not paid yet, in this case, it is a liability for a business that has to pay.
Insurance expenses that are due or not paid are recorded as followings:
| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | xxx | |
| Accrued Insurance Liability | xxx |
NOTE: Insurance premium that is used or expired are recorded as an expense in the statement of profit and loss and the insurance premium that is paid but not used or unexpired are recorded as an asset in the statement of financial position.
Insurance Expense Illustration For A Dental Clinic
A dental clinic purchases insurance of $1,000 premium annually and paid the whole amount in advance. How this transaction will be recorded in the financial statements?
Initially, the double entry will be recorded as follows:
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | $1,000 | |
| Cash/Bank | $1,000 |
At the year-end, the clinic will record these entries as follows:
| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | $1,000 | |
| Prepaid Insurance | | $1,000 |
Illustration For Unpaid Insurance Expense
A dental clinic purchases insurance of $1,000 premium annually and paid the amount in arrears. How this transaction will be recorded in the financial statements?
When the insurance cost is used, it is recorded as follows:
| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | $1,000 | |
| Accrued Insurance Laibility | | $1,000 |
When the insurance cost is paid, it is recorded as follows:
| Account | Debit | Credit |
|---|---|---|
| Accrued Insurance Liability | $1,000 | |
| Cash/Bank | | $1,000 |
Insurance Expense FAQs
Is insurance expense an asset or a liability?
If insurance is paid in advance, it is recorded as an asset but if the insurance is paid in arrears it becomes a liability for a business, and when the insurance cost is used it is recorded as an expense in the income statement.
Why is insurance expense an asset?
If you pay insurance in advance it becomes your asset because you own it and once you used that cost it becomes your expense.
What kind of account is insurance expense?
Insurance expense is the cost that businesses pay for securing their business operations. This is an expense account that is recorded in the income statement.
Is insurance considered a liability?
When an insurance cost is incurred or used but not paid is recorded as a liability in the balance sheet.
What is the adjusting entries for insurance expense when used and paid as well?
When the insurance expense is used but not paid, the insurance expense will be debited and the insurance liability will be credited and when the expense is paid, the insurance liability will be debited and cash /bank will be credited.