ou are doing Management report for March '22 and you see insurance premium of £2000 paid for the period Apr '22 – Mar '23. How you will show this expense in you report explain with journal.
Question
ou are doing Management report for March '22 and you see insurance premium of £2000 paid for the period Apr '22 – Mar '23. How you will show this expense in you report explain with journal.
Solution
The insurance premium of £2000 paid for the period Apr '22 – Mar '23 is a prepaid expense in the March '22 report. This is because the insurance coverage period extends beyond the current reporting period.
Here's how you would record this in your journal:
Step 1: Record the total payment in March '22 When the payment is made in March '22, you would debit (increase) the Prepaid Insurance account and credit (decrease) the Cash account.
Journal Entry in March '22: Debit: Prepaid Insurance £2000 Credit: Cash £2000
This entry reflects that you have paid £2000 for insurance that will provide coverage for the next year.
Step 2: Record the expense each month Each month, from April '22 to March '23, you would need to record the portion of the insurance that has been "used up" as an expense. Since the insurance covers a period of 12 months, you would divide the total cost by 12 to find the monthly cost.
£2000 / 12 months = £166.67 per month
So, each month, you would debit (increase) the Insurance Expense account and credit (decrease) the Prepaid Insurance account by £166.67.
Journal Entry from Apr '22 to Mar '23: Debit: Insurance Expense £166.67 Credit: Prepaid Insurance £166.67
By the end of March '23, the Prepaid Insurance account balance would be £0, and the total of £2000 would have been gradually transferred to the Insurance Expense account over the year. This method ensures that the expense is matched with the period it relates to, in accordance with the matching principle in accounting.
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