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How do I account for 10 payments of Worker's Comp Insurance which covers a full year?

Brad Bergkamp's Profile

We recently renewed our Worker's Comp Insurance. Under the agreement we have 10 payments during the year. Under the matching principal of accrual accounting I should record the expense 12 times for each month (if I remember my accounting courses correctly). It seems simple to divide the total Worker's Comp estimate by 12 to record the amount on a monthly basis. I guess my question is: What accounts am I using to record my 12 expenses for the year and what accounts am I using when I make my 10 payments (and since the 12 expenses are estimates how would I adjust for the true payment amounts which will be calculated on a monthly basis as we use payroll)?

Answers

Anonymous
(CFO/Board Advisor) |

Use a Prepaid/Accrued Expense Account. Classify as an asset or liability depending on whether the month end balance is a debit or credit.. Example:

Estimated Annual W/C Premium $12,000. Monthly payment $1,200 ($12,000/10 months).
Actual monthly expense based upon payroll: Month 1: $1,000; Month 2: $1,500

Month 1:
To record payment:
Dr. Prepaid/Accrued W/C Expense $1,200
Cr. Cash $1,200

To record expense:
Dr. W/C Expense $1,000
Cr. Prepaid/Accrued W/C Expense $1,000

Ending Balance: Dr. $200 - show as Asset

Month 2:
To record payment:
Dr. Prepaid/Accrued W/C Expense $1,200
Cr. Cash $1,200

To record expense:
Dr. W/C Expense $1,500
Cr. Prepaid/Accrued W/C Expense $1,500

Ending Balance: Cr. $100 - show as Liability

And like the shampoo bottle says, rinse and repeat as necessary.

Brad Bergkamp
Title: Accountant
Company: CC
(Accountant, CC) |

Thanks, Anonymous!

A little clarification: If the $1,200 is based on the estimate (12,000/10) but actual expense (for month 1) is $1,000 shouldn't I be crediting cash for 1k, not 1.2k?

Next question: what is the entry at the end of the year when my W/C Expense account does not match the total I've paid in Cash? (I'm imagining this is unavoidable since one is based on an estimate while the other is a real number)

Anonymous
(CFO/Board Advisor) |

1. The Cash entry will be whatever you pay. If Cash payments are based upon an estimate, as in my Example, then your monthly Cash payments will be $1,200. If Cash payments are based upon actuals then it will be whatever the actual expense is for that month. The 2 months where no payments are made are reflected in Accrued W/C Payable.
2. At year-end the difference between Cash payments and actual Expense will be reflected as either a Refund Receivable (paid more Cash than Expense incurred) or Premium Payable (Expense incurred is less than Cash payments).

Hope this helps.

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