When to Use Debits vs Credits in Accounting

You can put the insurance check back onto the same expense account that the original repairs were coded to which will offset that expense. The above journal uses the Other Income account to show it is not part of the normal day to day activity income earned by the business. Accountingcoach.com has a good example of accounting for payroll withholdings for health insurance. There are various types of insurance cover available to small businesses and business owners so we’ll have a look at those and how best to treat them in the accounts. Life insurance premium is classified as a personal account, since the insurance premium paid represents the amount paid for an individual. Insurance becomes an asset when you experience a risk covered in your insurance plan, which activates your coverage, allowing you to make a claim and receive a successful payout.

• Accrued expenses or liabilities occur when expenses take place before the cash is paid.
• For guaranteed life insurance, premium calculations depend on your age, gender, where you live, and coverage amount.
• To transfer what expired, Taxes Expense was debited for the amount used and Prepaid Taxes was credited to reduce the asset by the same amount.
• To transfer what expired, Insurance Expense was debited for the amount used and Prepaid Insurance was credited to reduce the asset by the same amount.
• Accrual accounting presents a more accurate measure of a company’s transactions and events for each period.

Take a look at this comprehensive chart of accounts that explains how other transactions affect debits and credits. The data in the general ledger is reviewed, adjusted, and used to create the financial statements. Review activity in the accounts that will be impacted by the transaction, and you can usually determine which accounts should be debited and credited. The debit increases the equipment account, and the cash account is decreased with a credit. Asset accounts, including cash and equipment, are increased with a debit balance.

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Guaranteed-issue life insurance has no health requirements and offers quick approval for coverage, which can be helpful if you have severe, terminal, or multiple health conditions. For companies that are responsible for external reporting, accrued expenses play a big part in wrapping up month-end, quarter-end, or fiscal year-end processes. A company usually does not book accrued expenses during the month; instead, accrued expenses are booked during the close period. In accounting terms, expenses tend to increase productivity while decreasing owner’s equity. Thus, an increase in expenses should be debited in the books of accounts.

• Like accrued expenses, prepaid expenses are also recorded in the reporting period when they are incurred under the accrual accounting method.
• The accrual method of accounting requires revenues and expenses to be recorded in the period that they are incurred, regardless of the time of payment or receiving cash.
• The adjusting entry ensures that the amount of insurance expired appears as a business expense on the income statement, not as an asset on the balance sheet.
• For example, when paying rent for your firm’s office each month, you would enter a credit in your liability account.
• And by separating your expenses into different accounts, you can determine where all of your money is going.
• The adjusting entry for rent updates the Prepaid Rent and Rent Expense balances to reflect what you really have at the end of the month.

After the asset is fully depreciated, no further adjusting entries are made for depreciation no matter how long the company owns the asset. The adjusting entries split the cost of the is insurance expense a debit or credit equipment into two categories. The Accumulated Depreciation account balance is the amount of the asset that is “used up.” The book value is the amount of value remaining on the asset.

What is the entry for insurance paid?

You had purchased supplies during the month and initially recorded them as an asset because they would last for more than one month. By the end of the month you used up some of these supplies, so you reduced the value of this asset to reflect what you actually had on hand at the end of the month ($900). What was used up ($100) became an expense, or cost of doing business, for the month. To transfer what was used, Supplies Expense was debited for the amount used and Supplies was credited to reduce the asset by the same amount.

This annual fee can be paid with a one-off payment or it can be spread over 12 monthly payments, or sometimes fortnightly. Thus it is written on the asset side of balance sheet until it is utilised. #9 – Insurance contracts Life insurance policies pay the insurance holder on maturity and are financial assets at the time of maturity; these policies pay the maturity amount of the policy. Prepaid insurance is credited to reduce the asset, reflecting there is now less unused insurance.

Insurance Expense Journal Entry

As each month passes, the Accumulated Depreciation account balance increases and, therefore, the book value decreases. The $100 balance in the Taxes Expense account will appear on the income statement at the end of the month. The remaining $1,100 in the Prepaid Taxes account will appear on the balance sheet. This amount is still an asset to the company since it has not expired yet. The $1,000 balance in the Rent Expense account will appear on the income statement at the end of the month.

This gradually expenses the original prepaid asset over the policy term. Prepaid insurance is credited to reduce the leftover unused amount of the asset. Before diving into insurance, let’s recap the basics of debits and credits.

In traditional double-entry accounting, debit, or DR, is entered on the left. When it comes to the DR and CR abbreviations for debit and credit, a few theories exist. One theory asserts that the DR and CR come from the Latin present active infinitives of debitum and creditum, which are debere and credere, respectively. Another theory is that DR stands for “debit record” and CR stands for “credit record.” Finally, some believe the DR notation is short for “debtor” and CR is short for “creditor.” The term debit comes from the word debitum, meaning “what is due,” and credit comes from creditum, defined as “something entrusted to another or a loan.”