Jane Dotson
Keeping track of insurance payments is a crucial aspect of financial management, whether for personal or business purposes. Properly recording monthly insurance payments ensures accurate bookkeeping and provides a clear overview of expenses and income. This process involves selecting the appropriate accounts, categorizing transactions correctly, and maintaining consistent documentation. While the specific steps may vary depending on the nature of the insurance and the accounting software used, a few general guidelines can help streamline the process. In this discussion, we will explore the key considerations and practical steps involved in recording monthly insurance payments, empowering individuals and businesses to manage their finances effectively.
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What You'll Learn
Record insurance payments as deposits
Recording insurance payments as deposits is a straightforward process, but it's important to be accurate to ensure your books balance. This is especially important when recording insurance claim payments, as these can affect your tax liability.
Firstly, you need to record the insurance payment as a deposit in your accounting software. If you are using QuickBooks, go to the Banking menu and select Make Deposits. If you are using REI Hub, click Add Transaction, then select Refund Received. You will then need to choose the account you want to deposit the money into from the Account drop-down menu. In the Received From column, select the insurance company or add it as a new vendor.
Next, you will need to enter the amount of the deposit. If you are using QuickBooks, you can select the appropriate income account, such as Insurance Claims. You will also need to add any relevant memos or details. In REI Hub, you will need to select the account where you deposited the check.
Finally, click Save and Close. You may also need to create a new revenue account if this is your first insurance claim payment. This will ensure that your books accurately reflect the reimbursement and any profits or losses.
Recording a monthly insurance payment as a deposit follows a similar process. You will need to record the payment as a debit to a prepaid expense account and a credit to cash or accounts payable. This upfront payment is initially recorded as a current asset on the balance sheet, and over time, you will need to allocate portions of the prepaid expense by creating journal entries that debit the appropriate expense account and credit the prepaid expense account.
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Categorise transactions correctly
To record monthly insurance payments correctly, it is important to categorise transactions properly. This can be done by creating a journal entry in the business bookkeeping records. The exact nature of the insurance payment will determine the categorisation. For example, if the insurance payment is for personal insurance proceeds, such as life insurance, and this money is paid into a business bank account, then the journal entry will be: Debit: Cash/Bank (asset account) and Credit: Capital (equity account).
If the business owner uses their own money to pay for insurance, then this does not need to be entered into the business bookkeeping records. However, if the business is making the payment, then the journal entry will be: Debit: Drawings (equity account) and Credit: Cash/Bank (asset account).
When an insurance claim is made by the business, the insurance provider will pay money to cover repair or replacement costs. These payments are called proceeds. In this case, the journal entry will be: Debit: Cash/Bank (asset account) and Credit: Other Income (income account). It is important to note that if the repair costs are less than the insurance payment, the difference will need to be recorded as income, with the journal entry being: Debit: Cash/Bank (asset account) and Credit: Damage (liability account) and Insurance Gain (income account).
To set up a payment received for an insurance claim, you can follow these steps: Go to the New menu and choose Bank Deposit under the Other section. On the Bank Deposit page, go to the "Add funds to this deposit" section and input the relevant information. In the Received from column, choose the insurance company name, and then select the relevant account in the Account field. Enter the amount and fill in the remaining fields before saving and closing.
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Use a balance sheet account
When recording monthly insurance payments, it's important to understand the different types of insurance and the specific accounting treatment required for each. In this case, we will focus on the "Use a balance sheet account" method, which is often used for personal insurance payments and prepaid expenses.
Understanding Personal Insurance Payments
Personal insurance payments are not considered deductible business expenses. Therefore, they should not be included in the Income Statement (Profit and Loss Report). Instead, they are recorded on the balance sheet. For example, if a business pays for insurance from its bank account, and the owner repays the business, the following entries are made:
- Business Makes Payment: Debit – Drawings (equity account); Credit – Cash/Bank (asset account)
- Owner Repays Business: Debit – Cash/Bank (asset account); Credit – Capital (equity account)
Prepaid Expenses and the Balance Sheet
Prepaid expenses, such as insurance, are typically recorded on the balance sheet as current assets. When a company prepays for insurance, it is initially recognised as a prepaid asset on the balance sheet, while simultaneously reducing the company's cash or payment account by the same amount. As the insurance coverage period progresses, the prepaid expense account is gradually reduced, and the expense is recognised on the income statement during the period in which it is incurred.
Recording Monthly Insurance Payments
To record monthly insurance payments using a balance sheet account, you can follow these steps:
- Identify the Prepaid Insurance Account: Set up a balance sheet account specifically for prepaid insurance. This account will track the amount of prepaid insurance you have at any given time.
- Record the Initial Payment: When you make the initial insurance payment, debit the Insurance Expense account and credit the Prepaid Insurance account. This transfer reflects the allocation of the payment to the upcoming coverage period.
- Monthly Adjusting Entries: Each month, make an adjusting entry to record the portion of insurance expense that has been utilised. Debit the Prepaid Insurance account and credit the Insurance Expense account. This transfer represents the expense for that particular month.
- Repeat for the Remaining Coverage Period: Continue making monthly adjusting entries until the entire prepaid insurance amount has been expensed. This ensures that the expense is recognised in the appropriate periods.
By using a balance sheet account, you can accurately track and allocate your monthly insurance payments, ensuring compliance with accounting principles and providing a clear financial picture for your business or personal finances.
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Record personal insurance proceeds
Recording personal insurance proceeds requires specific accounting procedures. Before insurance proceeds are paid out, the claim must be fully evaluated to determine the extent of the payment. When an individual purchases insurance, they are protecting themselves against any adverse situation that could result in a financial loss. The insured pays premiums to an insurance company, and as part of the arrangement, the insurance company is liable to payout proceeds against verified claims filed by the insured.
Insurance proceeds are the monies an insurance company pays to cover any financial loss. They are usually paid directly to a care provider (as with health insurance) or sent to the insured in the form of a check. Proceeds are typically paid out once a claim has been verified and cover any financial loss incurred by the insured that is covered under the policy. It is important to note that insurance proceeds are tax-free in most cases, regardless of the type of insurance or policy. However, there are certain exceptions, such as disability insurance, which is taxable to the insured as income if the insured used pretax income to pay premiums.
When accounting for insurance proceeds, it is necessary to remove the value of the damaged assets from your books and record the proceeds. This involves recording the full amount of the insurance proceeds and the full amount of the loss. For example, if a fire destroyed $15,000 worth of inventory, and the insurance company covered the entire loss, the following entries would be made: a $15,000 debit to fire damage and a $15,000 credit to inventory to remove the inventory from your accounting books. The second entry would be a $15,000 debit to cash-fire damage reimbursement and a $15,000 credit to fire damage. This procedure zeroes out the amount of fire damage loss.
Additionally, it may be necessary to disclose in the financial statement footnotes the nature of the events resulting in insurance proceeds, the amount of the proceeds, and the income statement line item in which the resulting gain is recorded. For example, if a company's facility sustained significant damage due to a fire, resulting in a loss of $50,000, and the company received insurance proceeds of $40,000, this net gain of $40,000 would be recognized under "Other Income" in the consolidated statement of income.
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Insurance journal entries
When you receive a bill from an insurance provider, the journal entry typically involves debiting the insurance expense (an expense account) and crediting accounts payable (a liability account). Once the payment is made, either in full or through monthly instalments, the bill amount is reduced, resulting in a decrease in the accounts payable account. For example, consider a $1,000 bill for General Liability insurance, followed by two monthly payments of $84 each. The journal entry for this scenario would be: Debit: Insurance Expense, Credit: Accounts Payable.
In the case of individual vehicle insurance, the insurance journal entry differs if paid from the business bank account. In such instances, the entry is: Debit: Drawings (equity account), Credit: Cash/Bank (asset account). However, a portion of the expense can be reclaimed as a business expense when calculating deductible vehicle expenses based on business usage of the personal vehicle.
When an insured event occurs and a claim needs to be settled, the journal entry reflects a reduction in cash and the recognition of an expense. This can be recorded as: Debit: Claims Expense, reflecting the cost of the insurance claim, and Credit: Cash/Bank or Claims Payable, indicating the outflow or liability settlement. Accurate recording of these transactions is crucial for transparency and informed decision-making.
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Frequently asked questions
Once you’ve deposited the insurance check in your bank account, record it as a refund. Click the "Add Transaction" button, then select "Refund Received". Choose "Asset Disposal" as the expense account and in the "Payment Account Refunded" field, select the account where you deposited the check.
Add the Project information to the "Received From" field. This will allow the income to appear on the project profitability report and on the P&L as income correctly.
Record a deposit of the vendor check. Go to "Make Deposits". In the "Received from" drop-down, select the vendor. In the "From Account" drop-down, select "Accounts Payable". In the "Amount" column, enter the amount of the refund, then save and close.
Create a dedicated insurance reimbursement account to track incoming payments. Establish separate expense categories for different claim types and set up liability accounts for pending insurance settlements.
