Prepaid expenses: definition, processes, and significance

Does Insurance Expense Go On The Balance Sheet?

Premiums have not been fully “earned” by the insurance company until the policy expires. If a policy is canceled before it expires, part of the original premium payment must be returned to the policyholder. Some assets are “nonadmitted” under SAP and therefore assigned a zero value but are included Does Insurance Expense Go On The Balance Sheet? under GAAP. Real estate and mortgages make up a small fraction of a property/casualty company’s assets because they are relatively illiquid. Life insurance companies, whose liabilities are longer term commitments, have a greater portion of their investments in residential and commercial mortgages.

Although technically more narrowly defined, the term “self-insurance” is commonly used to capture a wide variety of retained risk mechanisms. To that point, the colloquial use of “self-insurance” is generally used throughout this article unless specifically stated. If you’re primarily interested in a vehicle for growth or tax advantages, or to fund a specific purpose (like retirement, health care, or a child’s education), other types of investments may be more suitable. Edoardo Raimondi, CFO of Talent Garden, centralised cash management and saved his finance team up to 12 hours a week on administrative tasks. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.


The income statement approach does have an advantage if the entire prepaid item or unearned revenue is fully consumed or earned by the end of an accounting period. No adjusting entry would be needed because the expense or revenue was fully recorded at the date of the original transaction. Alternatively, an entity may use the contract rate in effect at inception of the book of contracts to discount certain expected cash flows, with no remeasurement of the liability through OCI. The revenue recorded on a universal life-type contract consists of mortality fees and contract administration assessments.

What is insurance expense on a balance sheet?

Insurance expense is the amount that a company pays to get an insurance contract and any additional premium payments. The payment made by the company is listed as an expense for the accounting period.

One objective of the adjusting entry is to match the proper amount of insurance expense to the period indicated on the income statement. The remaining $6,000 amount would be transferred to expense over the next two years by preparing similar adjusting entries at the end of 20X2 and 20X3. Explain the basic formats of financial statements, such as the income statement, balance sheet, statement of cash flows, and statement of retained earnings. The contract/cohort inception date discount curve is locked in for benefit expense recognition purposes.

How Are Prepaid Expenses Recorded in a Company’s Financial Statements?

Explain how the income statement, statement of owner’s equity and the balance sheet are interrelated. Prepaid expenses are recognised as a type of asset because they represent products and services whose benefits will only be incurred at a later date. Thankfully though, companies may still drastically lower their risk of encountering minor errors by automating their entire accounting procedure using smart credit control platforms like Kolleno. In summary, Kolleno is an all-in-one software that can be integrated into a business’s existing workflow, with the accounting team being seamlessly onboarded in no time.