Insurance Premium Paid by Cheque Journal Entry
Insurance is a form of risk management in which an individual or entity purchases a policy from an insurer in order to protect themselves from the potential financial loss that may result from an unexpected event.
The policyholder pays a premium to the insurer in exchange for the coverage, which can be used to reimburse them for costs associated with repairs, replacements, or medical expenses.
There are many different types of insurance policies available, and the one that is right for a particular business will depend on its specific needs and risks.
However, all insurance policies share the same basic structure: they provide financial protection in exchange for regular premium payments. By spreading the risk of potential losses across a large number of policyholders, insurers are able to offer this protection at a relatively low cost.
The company has to pay for the insurance expense and this is a burden for the company. The company has to manage the risks and this is a challenge. The company has to find ways to reduce the cost of insurance and this is an objective of the company. The company has to work with insurance companies to negotiate better rates.
The insurance premium is the amount of money that you pay regularly to an insurance company in order to be covered by their insurance policy. The size of your premium will depend on a number of factors, including the type of insurance you are looking for, the level of coverage you need, and the excess you are willing to pay. Sometimes, your premium may also be affected by your age, gender, or lifestyle.
However, it is important to remember that the cost of your insurance policy is not the only factor you should consider when choosing an insurer. You should also take into account the level of customer service they offer, as well as their claims history.
Journal Entry for Insurance Premium Paid by Cheque
The company purchases the insurance to ensure the coverage which specifies in the agreement contract.
The company has to pay the insurance company for the service received. A cheque is one of the payment methods that a company can use to settle with the insurance company.
When paying using a cheque, the company needs to record the cash outflow. On the other side, it will increase the prepaid insurance which is the current assets on the balance sheet.
The journal entry for insurance paid by cheque is debiting prepaid insurance and credit cash at bank.
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | XXX | |
| Cash at Bank | XXX |
The prepaid insurance is the current asset that will be reversed to expense when the company consumes the insurance service.
Example
Company ABC has purchased the insurance service for $ 20,000 to cover a period of 12 months. The company has made payment by using a cheque. Please prepare a journal entry for the insurance premium paid by cheque.
ABC has made a payment to the insurance company and it will receive the insurance cover for the period of 12 months.
ABC has to record the insurance paid as the current asset on the balance sheet. It is the prepaid insurance that will be reversed to the insurance expense at every month’s end until the end of the 12th month.
The journal entry is debiting prepaid insurance $ 20,000 and credit cash at bank $ 20,000.
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | 20,000 | |
| Cash at Bank | 20,000 |