A company has an insurance policy for fifty thousand dollars that is due. How is this set up when the company does not pay it in full. It is paid monthly to an insurance premium company within one year. How do we set it up on the company books? There is a note to Premium company for the whole amount of the premium.
To set up the insurance policy on the company books when it is paid monthly, you would follow these steps:
Step 1: Determine the total premium amount for the insurance policy. In this case, the total premium is $50,000.
Step 2: Set up a liability account on the company's books to track the amount owed to the insurance premium company. You can name it "Insurance Payable" or something similar.
Step 3: Record the initial entry to reflect the obligation. Debit the "Insurance Payable" account for the full amount of the premium ($50,000) and credit the "Premium Company" or "Notes Payable" account for the same amount. This entry acknowledges the liability to the premium company.
Step 4: Set up a monthly schedule or an accounts payable sub-ledger to track the payments made to the insurance premium company. This will help you keep a record of each payment and the remaining balance.
Step 5: Each month, when making a payment, debit the "Insurance Payable" account for the amount paid and credit the cash or bank account. This entry reflects a reduction in the liability.
Step 6: Continue recording these monthly payments until the full amount is paid off. As you make each payment, update your records to reflect the remaining balance on the insurance payable account.
By following these steps, you can accurately track the liability for the insurance premium on the company's books and ensure that it is paid off within one year.
To set up the insurance policy on the company books when paid in monthly installments, you will need to follow a few steps:
1. Determine the monthly payment amount: Divide the total premium of $50,000 by the number of monthly payments, which in this case is 12. The resulting amount will be the monthly payment.
2. Record the initial transaction: Create a journal entry to record the initial transaction. Debit the Insurance Expense account for the monthly payment amount, and credit the Premium Payable account for the same amount. This will establish a liability for the remaining payments.
3. Record monthly payments: Each month, when the company pays the premium to the insurance premium company, you need to record the payment. Create a journal entry debiting the Premium Payable account for the monthly payment amount and crediting the Cash or Bank account for the same amount. This reduces the liability and reflects the payment made.
4. Adjust the Premium Payable account: At the end of each month, you will need to adjust the Premium Payable account by debiting it for the monthly payment amount and crediting the Insurance Expense account. This recognizes the expense for the month.
5. Continue recording monthly payments and adjustments: Repeat steps 3 and 4 for the remaining months until the premium is fully paid.
Additionally, since you mentioned a note to the premium company for the full amount, it is advisable to also record the initial transaction as a liability on the company's balance sheet. This can be done by creating a separate Long-Term Liability account for the outstanding balance of the premium and recording the note payable transaction accordingly.
It is important to consult with an accounting or finance professional to ensure accurate and compliant recording of transactions in your specific company's books.