Journal Entry for Unexpired Insurance
Unexpired insurance (also known as prepaid insurance) is the amount of insurance that company pays to the insurance company in advance which is not yet fully consumed.
Insurance is the expense that company purchases from the insurance provider in exchange for the insurance service. The entity needs to pay the insurance fees on a yearly basis in order to receive the insurance cover. The entity needs to pay the insurance fees in advance to the insurance company. It is treated similarly to other advance payments. It will be classified as assets before reclassing to expense.
To comply with accounting rules, the customer needs to record advance payment of insurance to current assets on balance sheet. It is usually recorded as prepaid insurance or unexpired insurance. This balance will be reversed to insurance expenses on the income statement. The reverse of unexpired insurance will depend on the consumption of insurance services over the period.
The reverse of unexpired insurance will be made based on the consumption to ensure the expense is recorded properly. When the company pays for the insurance, it is not yet recorded as an expense. It has to stay on balance until it is used.
Journal Entry for Unexpired Insurance
The company requires to record unexpired insurance when payment is transferred to the insurance company. Company records unexpired insurance and decreases cash on balance sheet.
The journal entry is debiting unexpired insurance and credit cash payment.
| Account | Debit | Credit |
| Unexpired Insurance | XXXX | |
| Cash | XXXX |
The unexpired insurance will be recorded as current assets on the balance sheet. The cash will be reduced from balance sheet.
At the end of the accounting period, the company has consumed some insurance services, so it must allocate the expense for the period. It is the accounting principle that revenue and expense must record based on occurrence. For insurance, the expense is recorded when the company has utilized the service.
The journal entry is debiting insurance expenses and credit unexpired insurance.
| Account | Debit | Credit |
| Insurance Expense | XXXX | |
| Unexpired Insurance | XXXX |
The unexpired insurance will reduce from balance sheet and increase the insurance expense on income statement.
Journal Entry for Unexpired Insurance Example
ABC is a shoe manufacturing company. On 01 July 2022, company purchased insurance for $ 12,000 to cover from 01 July 2022 to 30 June 2023. Please prepare a journal entry for unexpired insurance.
ABC pays $ 12,000 for the insurance service from 01 July 2022 to 30 June 2023. The insurance expense needs to be spread over a period of 12 months. We cannot record it as an expense when making payment to the insurance provider.
On 01 July 2022, ABC needs to record unexpired insurance (or prepaid insurance) which is the current assets.
The journal entry is debiting unexpired insurance $ 12,000 and credit cash $ 12,000.
| Account | Debit | Credit |
| Unexpired Insurance (or Prepaid insurance) | 12,000 | |
| Cash | 12,000 |
At the end of July, ABC has consumed insurance service for a month, so ABC needs to record insurance expenses as well.
Monthly insurance expense = $ 12,000/12 months = $ 1,000 per month
ABC needs to record insurance expenses by reversing the unexpired insurance from balance sheet.
The journal entry is debiting insurance expense $ 1,000 and credit unexpired insurance $ 1,000.
| Account | Debit | Credit |
| Insurance Expense | 1,000 | |
| Unexpired Insurance (or Prepaid insurance) | 1,000 |
The insurance expense will be present on the income statement. The unexpired insurance will be decreased from balance sheet. By the end of the insurance term (30 June 2023), the unexpired insurance will be zero, the insurance expense will be $ 12,000 over a period of 12 months.
