I am trying to wrap my head around the reasoning why our controller posted our insurance in this manner (she retired and I am picking up the pieces). Example: Our liability policy runs January-December Annual premium is $12,000. However, we pay $1000 every month for 12 months (we receive a monthly invoice from our insurer). The way this has been done is: January 1 entry: DR Prepaid Expense 12,000 CR Other Payable 12,000 After each month, journal entry is done: DR Insurance Expense 1,000 CR Prepaid Expense 1,000 Monthly invoice entry by A/P clerk: DR Other Payable 1,000 CR Accounts Payable 1,000 Payment of monthly invoice: DR Accounts Payable 1,000 CR Cash 1,000 In my mind, since we pay monthly, we should only be using the Ins Exp, AP and Cash accounts. I understand that the first two entries above will result in a wash on the Balance Sheet, but the # of journal entries seems excessive, unnecessary and misleading on the financials. Should I continue in the vein of my former controller or simply just post the monthly invoices we receive to Insurance Exp/Cash? I really appreciate any and all insight!
Reasons to Amortize annual insurance amt when paid monthly
Just post the monthly invoices. It may have been that at one point she had to pay the whole balance upfront. If so then doing part of what she did would have made sense. But most insurance policies can be cancelled immediately and, given that case, to show a full year liability is incorrect. Also, consider that the cash realization value of the "prepaid asset" is zero. So her method is misstating things.
All those entries are wast of time. The monthly invoice should be recorded in A/P debiting insurance expense A/P credited. When payment is made, A/P debited and cash is credited. Those entries will be useful if the insurance was paid in full in January of the current year for the entire year. Debit prepaid insurance and credit cash. Then every month insurance expense of $1000 would be debited and prepaid insurance credited.
Thank you. I appreciate the feedback. Glad for the confirmation that my thinking was correct :-)