How To, News

Is Insurance Recognized as an Asset, Liability, or Expense?

Man Using Laptop

We all keep taking insurance covers, renewing them and even looking for new insurers at some point. The bottom line is, we find insurance solutions worth investing in. The question is, how many take time to ask themselves whether an insurance service is an asset, expense, or liability? Knowing this is important as you end up seeing which part of your financial life they are in.

This can be easy for an accountant as this is their field of expertise. However, as a person who has never been to an accounting class, it may be challenging. This understanding is crucial in knowing how your financial documents will look. Let’s find out the answers.

Insurance as an Expense

Insurance services majorly lay in the class of expenses. Generally, there are different types of costs, such as non-recurrent, fixed, and recurrent expenditures. For instance, they are under recurrent costs, but some may put them under the fixed class. It is mainly because you keep paying for the expenses over and over again.

This is why when preparing the balance sheet, you can hardly include insurance expenses. What you can do is affect the figures without necessarily having to feed them in. The documents typically account for the presence of the insurance by indicating the amount of money you have used. Since the balance sheet acts as a record of the finances your business owes or has at the moment, it is impossible to put the insurance expense here.

When doing the recording, people handling the accounts will find a way of making the expense reflect. For instance, when a company pays for insurance, the accountant will capture this by reducing the balance on the bank.

Insurance as an Asset

There are cases when the insurance acts as an asset. By definition, a purchase is something you own, and there is an effect on it when something happens in the future—for instance, having a house or a car that can be sold or damaged. Car insurance is a perfect example of the insurance expense which you can term as an asset. This insurance works so that you can get some gains at some point later whenever the risk occurs.

This means it can make your financial position get restored. This is one attribute common in all assets. If you live in Calgary, Alberta, it is essential to understand the different insurance companies’ insurance rates. It makes it easy to identify the insurers who make you get better compensation plans whether a risk occurs. The insurance experts in Calgary know which ways you can arrive at the different insurance quotes. Such knowledge is relevant for that accurate selection.

This is why bookkeeping work includes car insurance in the income statements rather than in the balance sheets. The income statement tries to show all the business’s financial activities across a period, usually one year. Your car insurance will show in the document as they are part of the expenditure. Initially, the expense will first go to the balance sheet, then the benefits will shift to the income statement.

The Prepaid Insurance

There is a particular case with the business insurance policy. The payment is a form of an asset itself. This is because you pay for it once for a specific period, depending on the agreement with the insurer. During such times, you will not have to pay for anything to have it, as it is rightfully yours. It is a characteristic of any typical asset. When you close the business or decide to cancel the policy, you can get some money back. This comes as a refund of the prepaid premium.

It makes prepaid insurance take part in the balance sheet equation as part of the assets. The best explanation for this is that it helps show the net worth of the business at a given time. When asked to count your purchases, you can comfortably include them with the actual value.

When it comes to insurance being a liability, the concern goes to how relevant the policy is. If you are covering a risk which you hardly experience, you will end up paying for premiums but not utilizing them in any way. It may be a liability sometimes. This is why doing a proper analysis of the policies is necessary before making a decision. You will likely secure one which is most relevant for your needs.

EuroImage Source:

Having looked at the different scenarios where insurance is an expense, asset, or liability, you need to pay critical attention to the purpose of taking the cover. Seeking guidance from professionals in the field of insurance is necessary. You end up understanding many other things, such as the different insurance quotes by the insurance companies.

More on this topic:

Buying The Best Insurance Policy To Suit Your Needs and GST

Previous ArticleNext Article