Accounting Entry to Record Finance of Insurance Premiums
Knowing the basic journal entries in the Generally Accepted Accounting Principles system will make anyone's life easier, but especially managers. There are a number of journal entries that are important and one of those accounting journal entries is recording the financing of insurance premiums. Insurance is a standard business need and sometimes it gets very expensive. In those times, a business is able to obtain financing to help spread out the cost of insurance.
Journal entries are the way transactions are recorded in accounting. They all have to fit the basic accounting formula of assets equal liabilities plus shareholder's equity. With that in mind, it is easier to understand journal entries. A simple journal entry is paying cash for supplies. Since both of these are assets, only assets are affected. In this case, you are increasing one asset account in expense of the other. The journal entry would increase supplies and decrease cash.
Recording journal entries for insurance premiums are also similar. If you are paying cash, you are again increasing one asset account at the expense of the other because both cash and prepaid insurance are assets. Since you are using cash, your cash will fall and prepaid insurance will rise but total assets will stay the same. The prepaid insurance would be expensed on the income statement as the expense is made. So after one month you would expense one month of insurance.
For the financing of insurance premium, the entries are also simple but there will be two entries this time instead of one. The order of the journal entries could be different but they will be similar to this. First, you will purchase insurance but since you don't have or want to use your cash, you will purchase it on account and agree to pay it within a time period. The entry here would be an increase in prepaid insurance and an increase in accounts payable.
The second entry will be the financing portion. You will find someone to finance your insurance. You will get a loan. For your obligation to pay, you will receive cash. Cash will increase and loans payable will rise. You will then have to pay the obligation on time so you don't default on your loan. With the cash you receive you will pay off the insurance premium, which will decrease your accounts payable and your cash.