[number_cruncher_24]

Hi – I was wondering if someone could help me with an accounting question – here’s the scenario: Our fiscal year ends on May 31. We received a bill for our insurance policy on May 20. The bill is for insurance for the period of 6/15 through 12/15. We enter all bills into the system when received. When I enter this bill into the system, it will result in a credit to A/P but which account should be debited? It’s not an expense for the current fiscal year because it is for a future period, but we won’t pay it until after 5/31, so it’s not a prepaid yet either.

[seattleacct]

I don't think you should put anything into prepaid expenses, unless you actually make a payment. That's the whole point of the account.

If you need to enter an invoice as soon as you get it, but you're waiting until after year-end to pay it, I would create an “other asset” account and book it there, but definitely not prepaids.

DR: “Other Asset”

CR: A/P

Then, if you actually end up making the payment after year-end, make AJEs:

Dr: A/P

Dr: Prepaid Exp

Cr: Cash

Cr: Other Asset

Now your insurance is actually a prepaid expense, which you expense periodically throughout the year when the insurance period is used.

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[seattleacct]

I don't think you should put anything into prepaid expenses, unless you actually make a payment. That's the whole point of the account.

If you need to enter an invoice as soon as you get it, but you're waiting until after year-end to pay it, I would create an “other asset” account and book it there, but definitely not prepaids.

DR: “Other Asset”

CR: A/P

Then, if you actually end up making the payment after year-end, make AJEs:

Dr: A/P

Dr: Prepaid Exp

Cr: Cash

Cr: Other Asset

Now your insurance is actually a prepaid expense, which you expense periodically throughout the year when the insurance period is used.

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[jeff]

This thread reminds me of an Onion article for some reason.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[jeff]

This thread reminds me of an Onion article for some reason.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[LaxCPA]

Care to shed some light on how you would do it Jeff?

[LaxCPA]

Care to shed some light on how you would do it Jeff?

[jeff]

That question is clearly pre-test, so I would choose “B” and move on.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[jeff]

That question is clearly pre-test, so I would choose “B” and move on.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[jeff]

Dr. Pension Expense

Cr. Fund Balance

Done.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[jeff]

Dr. Pension Expense

Cr. Fund Balance

Done.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[acamp]

But how do we account for the bitcoins?

Whhaaaaaaa, I can look up the value on a trusted Bloomberg terminal?! How exciting!

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[acamp]

But how do we account for the bitcoins?

Whhaaaaaaa, I can look up the value on a trusted Bloomberg terminal?! How exciting!

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[Mayo]

At the end of the day, booking it as a Prepaid offers the most information to a potential investor. In that a current asset will be available for future benefits in the form of insurance. See this summary of accrual accounting as said by the FASB:

“Accrual accounting depicts the effects of transactions, and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and

payments occur in a different period. This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts

and payments during that period. “

Reference:

https://asc.fasb.org/cs/ContentServer?c=Document_C&sitepfx=FAF&pagename=FAF/Document_C/CodDocumentPage&cid=1176157498129

Note the words, “economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.”

Assuming that the OP's company buys the policy BEFORE the time period of coverage, I'd find it difficult to conclude that booking the economic event as a Prepaid Asset, offset by a Current Liability, is not appropriate.

Mayo, BBA, Macc

[Mayo]

At the end of the day, booking it as a Prepaid offers the most information to a potential investor. In that a current asset will be available for future benefits in the form of insurance. See this summary of accrual accounting as said by the FASB:

“Accrual accounting depicts the effects of transactions, and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and

payments occur in a different period. This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts

and payments during that period. “

Reference:

https://asc.fasb.org/cs/ContentServer?c=Document_C&sitepfx=FAF&pagename=FAF/Document_C/CodDocumentPage&cid=1176157498129

Note the words, “economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.”

Assuming that the OP's company buys the policy BEFORE the time period of coverage, I'd find it difficult to conclude that booking the economic event as a Prepaid Asset, offset by a Current Liability, is not appropriate.

Mayo, BBA, Macc

[HerdCPA]

I understand your logic Mayo however I believe it should be shown differently. If the policy is purchased (I'm assuming you are saying they pay for it) the entry would be Dr. Prepaid asset Cr. Cash. If it is not paid for before the balance sheet date no entry should be made since no benefit has been received and no liability has been incurred. If the entry is significant enough to be important for investors the entry should still not be recorded. It should be disclosed in the financial statements as a separate note.

What economic effect is received from an insurance policy that does not cover the period presented? The policy has nothing to do with the period that will be presented in the financial statements.

I believe we have to make the separation and not make entries just because it will happen soon. Using your logic we could record sales that occurred early in the following month because it would be helpful for investors. As I stated above the entry should not be made but a disclosure is appropriate if it will benefit the investors.

[Author]

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