Insurance is a very important part of money management, making sure that your company and you are covered against unexpected damages. For final accounts, how insurance is accounted for helps show a true financial picture. We discuss the place of insurance in last accounts, how insurance is counted, and its effect on a financial statement in this article.
What Are Final Accounts?
Last accounts are the accounts that are generated at the close of an accounting period to give information about the business’s financial health and performance. They include:
- Gross profit/loss on Trading Account: Gross profit/loss.
- Profit and Loss Account: Shows Net Profit or Loss.
- Assets, Liabilities, and Capital: List of all the assets, liabilities, and capital.
All of them give us great information on the organization’s financial position, and insurance premiums can pop up in several places in such accounts.
Insurance in the Final Accounts
There are different insurances in final accounts. Insurance costs can be grouped according to purpose:
- Business Insurance: Insurance policy that includes business liability (failure to provide insurance for fire, theft, etc).
- Employer Health/Life: Health/Life insurance of workers.
- Prepaid Insurance: Invoices paid for insurance that is over the current accounting period.
- Still Remaining Insurance: Insurance costs incurred, but not yet paid.
Where Insurance Turns Up in Accounts Resulting From Claims
1. Profit and Loss Account
Insurance premiums are expenses and get added to the Profit and Loss Account. For example:
- Charges to Side: Insurance charges are debited as it affects the business net profit.
- Prepaid or Existing Insurance Reductions:
- Prepaid Insurance: Add to the total insurance cost for the current period portion.
- Unpaid Insurance: Added to the cost to cover the unpaid amount for the current month.
2. Balance Sheet
Adjustments related to insurance are also recorded on the balance sheet as present assets or liabilities:
- Prepaid Insurance: Listed in Current Assets since it is future economic returns.
- Current Liabilities Outstanding Insurance: Paid under Current Liabilities as a debt of the business.
Accounting Approach to Insurance in Final Accounts
Good insurance accounting includes corrections to make sure you are complying with the matching principle. This is a law of nature which makes sure that the costs are equal to the profits for the same period.
Steps to Account for Insurance:
- Note the Premium Payment: At first, put it as an expense in the accounts.
- Adjust for Prepaid Insurance:
- Calculate the leftover portion of the premium.
- Add the prepaid amount to the insurance bill.
- Adjust for Outstanding Insurance:
- Divide the unpaid by the insurance cost.
- Mark it down as an expense in the account.
Figures of Insurance Adjustments in Final Accounts
Scenario 1: Prepaid Insurance
One company, paying $12,000 a year for an insurance policy, closes its book on July 1, and it’s 31 December. This one is for $6,000 (July to December) and the rest of it is prepaid.
Treatment:
- Balance Sheet: $6,000 reflected as a charge.
- Balance Sheet: $6,000 on the prepaid insurance as current.
Scenario 2: Outstanding Insurance
An organization incurs a $5,000 insurance expense and only pays $3,000 at the end of the accounting cycle.
Treatment:
- Profit and Loss Book: $5,000 as an expense.
- On the Balance Sheet: $2,000 in current loss under existing insurance.
Insurance: Indirect Contribution to Final Balances
- Financial Statement Accuracy: Incorrect accounting for insurance leads to inaccurate statements.
- Accounting Standards: Compliance to GAAP or IFRS avoids misrepresentation.
- Better Decision-Making: With the right data, stakeholders can make better business decisions related to the business and risk management.
- Tax Consequences: By correctly recording insurance expenses, you reduce tax payments.
Challenges in Accounting for Insurance
- Complex Modifications: There are prepaid and unused amounts which need to be calculated and adjusted in a complicated manner.
- Many Policies: In companies with a high number of insurance policies, it might be difficult to control and budget for.
- Accounting Changes or Taxation Issues: Accounting policies or tax rules change the accounting treatment for insurance.
Guidelines on Taking Care of Insurance in Cash-Finishing Accounts
- Keep Close Accounts: Ensure all insurance premiums and time periods are kept.
- Automate Accounting: Use accounting software to make it easy to reconcile the prepaid and due balances.
- Audits on a Regular Basis: Regular audits provide the right financial information.
- Talk to Experts: Seek experts to deal with accounting jargon.
Conclusion
Insurance is also very important for final accounts, both on the Profit and Loss Account and the Balance Sheet. An accounting treatment that makes the business be able to keep accurate records, comply with regulations, and make smart financial choices. Once you know where insurance enters the final accounts and how to handle it, businesses can protect their bottom line and flourish long-term.
