[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.

[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.

[mla1169]

Since a link is the be all end all of credibility to someone who's been here a couple of hours here you go

https://www.accountingcoach.com/accounts-payable/explanation/3

Note: Under the accrual method of accounting, a company's financial statements must report all expenses and liabilities that are probable and can be measured even if the vendors' invoices have not yet been received or fully processed.

The liability is probable and can be measured. Ta-da.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

Since a link is the be all end all of credibility to someone who's been here a couple of hours here you go

https://www.accountingcoach.com/accounts-payable/explanation/3

Note: Under the accrual method of accounting, a company's financial statements must report all expenses and liabilities that are probable and can be measured even if the vendors' invoices have not yet been received or fully processed.

The liability is probable and can be measured. Ta-da.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[HerdCPA]

Using that logic we can go ahead and record the rent for the next year since it is probable we will stay in the same building and the lease agreement has been issued. (This is sarcasm, don't start doing this) Twisting the words of a link does not make you right. The liability still needs to be incurred. A liability is defined as ,”In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.” This is a future transaction. It has not occurred yet. No benefit has been received. If they chose another insurance provider and informed the original insurer before the start of the period covered, they could crumble up your precious invoice and never pay another dime to the company. This should show you that it is in fact not a liability.

[HerdCPA]

Using that logic we can go ahead and record the rent for the next year since it is probable we will stay in the same building and the lease agreement has been issued. (This is sarcasm, don't start doing this) Twisting the words of a link does not make you right. The liability still needs to be incurred. A liability is defined as ,”In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.” This is a future transaction. It has not occurred yet. No benefit has been received. If they chose another insurance provider and informed the original insurer before the start of the period covered, they could crumble up your precious invoice and never pay another dime to the company. This should show you that it is in fact not a liability.

[KBinMN]

I'd rather overstate liabilities than understate them.

You can make a case either way. In practice we have posted to a/p and prepaid.

But hey I've only been an accountant since '07. LOL

[KBinMN]

I'd rather overstate liabilities than understate them.

You can make a case either way. In practice we have posted to a/p and prepaid.

But hey I've only been an accountant since '07. LOL

[Mayo]

Good points, and like I said earlier, it depends a lot on the nature of the policy in question and the actions taken when receiving the invoice.

Assets have three characteristics: 1) Future Benefits, 2) Control 3) Occurrence of a past Transaction

If say, the invoice is indicative that the policy has already been agreed upon by the insurer and the company, then that means that the company is obligated to pay for that policy.

This creates a liability – The Credit to AP, and is indicative that a transaction occurred.

What about Control? Control is defined by FASB as “the future economic benefit that the entity can control and thus can, within limits set by the nature of the benefit or the entity' s right to it, use as it pleases.”

In which case, the company now has access to insurance after 6/15 unless a triggering event, nonpayment, denies that access. Its no different that a house mortgage. That is your asset, until you decide to stop paying, in which case that asset then is transferred to the lender. Hell, some loans allow you to not make any payments on your house for a few years, as it accrues interest (which is a payable by the way).

We fall into this thinking that “prepay” must mean we have already paid in cash. But per the FASB, it's “an asset resulting from a current cash payment (or the equivalent) with deferred recognition of revenues, expenses, gains, or losses.”

Note the use of “or the equivalent”. The AP here is the equivalent.

Mayo, BBA, Macc

[Mayo]

Good points, and like I said earlier, it depends a lot on the nature of the policy in question and the actions taken when receiving the invoice.

Assets have three characteristics: 1) Future Benefits, 2) Control 3) Occurrence of a past Transaction

If say, the invoice is indicative that the policy has already been agreed upon by the insurer and the company, then that means that the company is obligated to pay for that policy.

This creates a liability – The Credit to AP, and is indicative that a transaction occurred.

What about Control? Control is defined by FASB as “the future economic benefit that the entity can control and thus can, within limits set by the nature of the benefit or the entity' s right to it, use as it pleases.”

In which case, the company now has access to insurance after 6/15 unless a triggering event, nonpayment, denies that access. Its no different that a house mortgage. That is your asset, until you decide to stop paying, in which case that asset then is transferred to the lender. Hell, some loans allow you to not make any payments on your house for a few years, as it accrues interest (which is a payable by the way).

We fall into this thinking that “prepay” must mean we have already paid in cash. But per the FASB, it's “an asset resulting from a current cash payment (or the equivalent) with deferred recognition of revenues, expenses, gains, or losses.”

Note the use of “or the equivalent”. The AP here is the equivalent.

Mayo, BBA, Macc

[mla1169]

If there was an invoice for the full years rent that would be due in 30 days or less from the first of the year, yes you would. Accounts payable rarely includes payments that are due in more than 30 or 45 days.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

If there was an invoice for the full years rent that would be due in 30 days or less from the first of the year, yes you would. Accounts payable rarely includes payments that are due in more than 30 or 45 days.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[NYCaccountant]

I do this at work all the time – enter the bill through the interface and use a prepaid account as the debit, than I post an adjusting journal debiting AP and Crediting Prepaid expenses. End result is that bill is in the system, and my prepaid expenses and AP is properly stated. Truth is that it's not a payable or a prepaid expense yet, just an invoice, so just put it in through the system, reverse out the effect and you've accomplished your goal.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[NYCaccountant]

I do this at work all the time – enter the bill through the interface and use a prepaid account as the debit, than I post an adjusting journal debiting AP and Crediting Prepaid expenses. End result is that bill is in the system, and my prepaid expenses and AP is properly stated. Truth is that it's not a payable or a prepaid expense yet, just an invoice, so just put it in through the system, reverse out the effect and you've accomplished your goal.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[HerdCPA]

I give up. I am assuming most people in this thread do not work in public accounting and were told what to do in this situation when they were trained for their A/P clerk position. My advice: don't answer this way on the CPA exam.

[HerdCPA]

I give up. I am assuming most people in this thread do not work in public accounting and were told what to do in this situation when they were trained for their A/P clerk position. My advice: don't answer this way on the CPA exam.

[Author]

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