[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.

[Anonymous]

If someone pays their liability insurance for 1 year, here are the entries they make:

Dr. Prepaid Ins.

Cr. A/P

Dr. A/P

Cr. Cash

It doesn't matter when the second part of the entry actually occurs. The two could be a few days apart or several weeks apart. It makes no difference.

But I'm just the auditor so what do I know.

[Anonymous]

If someone pays their liability insurance for 1 year, here are the entries they make:

Dr. Prepaid Ins.

Cr. A/P

Dr. A/P

Cr. Cash

It doesn't matter when the second part of the entry actually occurs. The two could be a few days apart or several weeks apart. It makes no difference.

But I'm just the auditor so what do I know.

[Mayo]

And for those unfamiliar with insurance policies/contracts, see page 8 on this link:

https://www.doughertypainters.com/WORKERS_COMPENSATION_iNSURANCE_POLICY..pdf

“We may cancel this policy for one or more of the following

reasons:

a. Non-payment of premium;”

or even page 9

“If you fail to reimburse us for any amounts as required by this endorsement, we may cancel this policy for nonpayment.”

Finally….page 11,

“This endorsement…is effective on the date issued unless otherwise stated.”

So, long story short…it IS a transaction if the policy endorsement has been signed, which I would assume since they have received an invoice.

Mayo, BBA, Macc

[Mayo]

And for those unfamiliar with insurance policies/contracts, see page 8 on this link:

https://www.doughertypainters.com/WORKERS_COMPENSATION_iNSURANCE_POLICY..pdf

“We may cancel this policy for one or more of the following

reasons:

a. Non-payment of premium;”

or even page 9

“If you fail to reimburse us for any amounts as required by this endorsement, we may cancel this policy for nonpayment.”

Finally….page 11,

“This endorsement…is effective on the date issued unless otherwise stated.”

So, long story short…it IS a transaction if the policy endorsement has been signed, which I would assume since they have received an invoice.

Mayo, BBA, Macc

[mla1169]

At may 31, trust me a business knows with 100% certainty whether or not they're renewing a policy effective 6/15. You don't go to the insurance store on June 14.

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

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

At may 31, trust me a business knows with 100% certainty whether or not they're renewing a policy effective 6/15. You don't go to the insurance store on June 14.

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

Massachusetts CPA (non reporting) since 3/12.

[Mayo]

lol @ “insurance store”.

Mayo, BBA, Macc

[Mayo]

lol @ “insurance store”.

Mayo, BBA, Macc

[Anonymous]

@mla1169 – They may also have debt covenants that require insurance. Yup, I check for those!

[Anonymous]

@mla1169 – They may also have debt covenants that require insurance. Yup, I check for those!

[Mayo]

“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)”

Wait what? That's exactly what you would do. Why wouldn't you?

It's called lease accounting for a reason right?

Mayo, BBA, Macc

[Mayo]

“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)”

Wait what? That's exactly what you would do. Why wouldn't you?

It's called lease accounting for a reason right?

Mayo, BBA, Macc

[Anonymous]

@Mayo – Yup, I check for those too!

[Anonymous]

@Mayo – Yup, I check for those too!

[Mayo]

“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.”

No, it's a Non-Recourse liability. They in effect take control of the asset, in this case the policy, and destroy it. The economic value to them was in the future stream of premium payments. The policy now has no other tangible value, so they don't need it.

Doesn't mean it wasn't owed. It just means that it was owed, not paid, and now the company no longer has access to the policy.

Mayo, BBA, Macc

[Author]

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