How to account for the liability insurance

The companies have insurance liability to protect the assets of the company’s demands, when employees or customers are injured on the property of the company or when employees are injured while performing company business. Premiums for liability insurance are usually paid in a lump sum in advance for coverage for next year, so the entire amount of the annual payment is an expense of the Company paid in advance. The steps required to properly account for liability insurance depend on whether your company uses the cash method or accrual accounting.

Instructions

  1. Accumulation method
  2. Create an account called “pre-paid insurance” section of “assets” in the general ledger.
  3. Create an account called “cost of liability insurance” in the section “Expenses” in the general ledger.
  4. Records the total amount of expenses paid insurance as an increase in insurance account pre-payment. The accrual method requires that a charge business expenses pre-payment of an item on the amount of time it covers.
  5. Records the full amount of insurance costs paid, as a decrease in the checking account.
  6. Divide the total amount of insurance costs paid by 12 to obtain an amount of monthly expenses for liability insurance.
  7. Recorded a decrease in insurance bill pre-paid at the end of the month, equivalent to one month’s expenses, as calculated in Step 5.
  8. Shows an increase in the expense account of liability insurance, monthly expenses for the end of the month.
  9. Continuous recording a monthly expenses at the end of each month in the account insurance prepaid expense account and liability insurance, until the entire amount of the insurance itself is loaded.

Effective method

  1. Create an account called “costs of liability insurance” in the section “Expenses” in the general ledger.
  2. Records the total amount of expenses paid insurance as an increase in expenses account liability insurance. The cash accounting method requires that a recognized business expenses to pay, so the total cost of the policy takes charge when paid and not prorated during the year.
  3. Records the total amount of paid insurance expense as a decrease in the checking account.

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