It ensures that the company is accurately recording the cost of insurance and that the prepaid insurance account is properly adjusted. The journal entry also helps to ensure that the company is properly tracking its expenses. Assume that a company’s annual premium on its liability insurance policy is $2,400 and is due on the first day of each year.

In accounting, a debit or credit can either increase or decrease an account, depending on the type of account. The accounting entry to record accrued interest requires a debit and a credit to different accounts. Assets are items the company owns that can be sold or used to make products. This applies to both physical (tangible) items such as equipment as well as intangible items like patents.

Are insurance proceeds income?

Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. Debits and credits are two of the most important accounting terms you need to understand. This is particularly important for bookkeepers and accountants using double-entry accounting. Offer pros and cons are determined by our editorial team, based on independent research.

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. Depending on the type of account, debits and credits function differently and can be recorded in varying places on a company’s chart of accounts. This means that if you have a debit in one category, the credit does not have to be in the same exact one.

Lender’s Interest Income

General expenses pertain to operational overhead expenses that impact the entire business. G&A expenses include rent, utilities, insurance, legal fees, and certain salaries. The debit balance at the end of the year is shown on the asset side of the balance sheet and the amount is insurance expense a debit or credit is carried forward to the next year. Life insurance premium is classified as a personal account, since the insurance premium paid represents the amount paid for an individual. Like all financial products, prepaid insurance has both advantages and disadvantages to consider.

• On December 31, the company writes an adjusting entry to record the insurance expense that was used up and to reduce the amount that remains prepaid.
• The credit part of the adjusting entry is the asset account, whose value is reduced by the amount used up.
• Banking services provided by Community Federal Savings Bank, Member FDIC.
• The above journal uses the Other Income account to show it is not part of the normal day to day activity income earned by the business.
• Profit is calculated by first taking into account total operating expenses.
• Let’s review the basics of Pacioli’s method of bookkeeping or double-entry accounting.

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.