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Insurance Premium Financing


(@giselle)
Joined: 2 years ago
Posts: 1
Topic starter  

Hi there, 

One of my clients recently renewed their insurance policies and decided to finance the premiums. A portion of the premium was a down payment to the broker. The remaining balance is owed to the financing company in equal monthly payments. The information I am reading is a bit confusing. So I am not sure if this is a loan or a prepaid expense. Could someone please advise on how we should book these transactions?  

Thanks in advance for your help!

Best, 

Giselle

 


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 Susan
(@Susan)
Joined: 1 year ago
Posts: 2
 

Hi,

This are a couple of entries but this is  cleanest audit trail to follow. There are two separate issues that you are handling thus, the extra entries.

Entry #1.  debit the entire amount of the insurance policy to prepaid insurance and credit Insurance Financing.

Entry #2: Divide the amount of the premium by 12. this will be the amount that will be credited to prepaid insurance and debited to insurance expense as you pay for each month.

Entry #3: Credit the down payment to Insurance financing and debit cash.

Entry #4: You can now debit insurance expense and credit pre-paid insurance for the number of months that  will be covered within the remaining calendar year.

Entry #5: As you pay the monthly finance premium, the check will cover both the cost of the insurance as well as the interest.  The invoice will be broken down into interest and principal for the financing. Split the check to debit insurance financing and Interest:Insurance Financing. Remember, the invoice will not coincide with your monthly breakdown because the company is using 12 months to record the insurance and interest expense and most policies are paid over 9-10 months. 

Hope this helps.  


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