Life insurance covers the policyholder’s life in case of a mishap.
So, premium is an expenditure for the individual taking the policy.
The frequency of payments can be monthly or quarterly, half-yearly, or annual.
It depends on the agreed terms between the parties.
Premiums are paid as a mandate from the debit cards, credit cards or net banking.
Lets see exactly how to record Life Insurance Premium paid by cheque journal entry.
The Insurance Premium and Bank are the GL account part of this transaction. The journal entry will be
Table of contents
- What’s the journal entry for premium paid in advance?
- What is the Entry if the entire amount is not prepaid?
- What if some part of it relates to the current period?
What’s the journal entry for premium paid in advance?
The Prepaid Insurance amount is considered an asset, and it’s because the excess payment does not relate to the current period expenditure. When recording any financial transaction, we must adhere to the Matching Concept.
Per Matching Concept, “Deduct only the Expenses which relate to the current period from the Current year Income.”
Therefore, the prepaid is not a part of the Statement of Profit and Loss. However, we will present it as an asset under the Balance Sheet. Let us look at how to record this transaction.
What is the Entry if the entire amount is not prepaid?
The above Entry applies where the entire payment does not relate to the current period.
Want to read a practical example of insurance policy. Go through this example.
What if some part of it relates to the current period?
Then, one more GL account will record the current year’s expenditure. The Journal entry will be as below.
Paid for life insurance premium by cheque Rs.6000 journal entry
The above transaction is the same as the parent topic. The distinction is the explicit mention of the premium amount.
GL descriptions shall be as descriptive as possible. The description of Insurance Premium does not provide a complete picture of the transaction.
Note: Life Insurance Claim
What about the relevant GL description?
The formula is straightforward. Identify the nature of the transaction and apply it. Here, the purpose is not for medical or vehicle insurance; the transaction is for Life insurance.
The ideal Journal Entry, as per the above understanding, is
What is the journal entry if you paid your life insurance premium from the office’s cash?
Transaction results in an increase of liability from Partner to business as per the business entity concept. So, we can reduce the Capital account or increase the drawings to the insurance premium.
The Journal Entry, in the case of drawings, is
How do you record an insurance payment?
Insurance can be for Health, Marine, Vehicle, Home, Fire, Theft, etc. So, the critical part before recording this transaction is to identify the nature.
The naming of the GL account will have the most significant impact on understanding the transaction’s nature. The GL description should be Home Insurance Premium Account if the expense is for home insurance.
We will, however, learn accounting for this transaction in a general sense. The insurance payment journal entry will be
Entities will generally record the accrual entry by debiting the expense and crediting the liability. So, the liability account will be debited for payment entry.
Life Insurance Premium paid by Cheque Journal Entry is to record the premium paid through the bank. The transaction results in increasing expenditure and a reduction in the bank balance. The Journal entry is debiting the insurance premium and crediting the bank account.
If the transaction relates to a scenario where the partner spends the office money to pay a personal life insurance premium, then we will consider it drawings. The Journal entry will be debiting the drawing account and crediting the bank account.