Insurance companies are generally adamant about discontinuing coverage when policyholders fail to pay premiums on time. After suspending a policy, an insurer typically requires that a policyholder pay the outstanding balance and fees before resuming the contract. Under accounting rules, the policyholder records premiums as “insurance expense” -- indicating outstanding balances as “insurance payable.”
Insurance expense is a charge a business incurs to protect its operations against adverse commercial or life events. The company signs a contract with an insurance company and agrees to pay periodic premiums in return for risk protection. As a policyholder, the organization can select coverage for a vast array of events. These include protections in adverse situations related to auto, home and health. Other operating risks against which an organization can insure its activities include casualty, property, legal liability, credit and life. Credit insurance may be one of the most important forms of protection because it shields companies from substantial losses that often result from business partners' bankruptcies and temporary financial distress.
Insurance payable is a debt related to insurance expense. It is a component of a corporate balance sheet, also known as a statement of financial condition or statement of financial position. Insurance payable shows the amount of unpaid premiums that a policyholder must settle at a point in time, such as the end of a month, quarter or fiscal year.
Insurance expense and insurance payable are distinct terms; one is an expense and the other is a liability. However, both terms interrelate because there wouldn't be an insurance payable amount without an insurance expense. This is because the debt only emerges if a policyholder does not pay the premiums on time and in accordance with contractual agreements. Companies that promptly settle their insurance bills do not show insurance payable amounts on their statements of financial position.
Financial Accounting and Reporting
To record insurance expense and insurance payable transactions, corporate bookkeepers conform to specific norms. These include recommendations from the United States Securities and Exchange Commission and the Financial Accounting Standards Board, as well as generally accepted accounting principles and international financial reporting standards. To record insurance expense, a bookkeeper debits the insurance expense account and credits the insurance payable account. By doing so, the junior accountant simultaneously shows a surge in corporate costs and debts. When the company pays its premiums, the bookkeeper credits the cash account and debits the insurance payable account. This entry brings the insurance payable account back to zero, therefore settling the debt. The accounting concepts of debit and credit run counter to the banking terminology. Crediting cash, an asset, means reducing company money.