How to account for prepaid insurance paid in installments?
If our business commits to an insurance policy for 1 year and pay 5 premiums of 50,000 in jan, feb, mar, april, and may. When should we record the expense and for how much and into what accounts.
Tags: Account, booked as prepaid insurance, installments, Insurance, Paid, Prepaid
You would want to amortize the total annual expense equally or the course the year. So with you example, the total insurance expense for the year would be $250,000 so to amortize that equally each month, you would record a monthly expense of $20,833.33 ($250,000 / 12). The installment payments would booked to Prepaid Insurance, with the monthly expense entry amortizing that expense.
Installment Payment:
Dr Prepaid Insurance $50,000
Cr Cash $50,000
With 5 installments, that makes $250,000 insurance paid
Monthly Insurance Expense:
Dr Insurance Expense $20,833.33
Cr Prepaid Insurance $20,833.33
With 12 months, that makes $250,000 insurance expensed