What Is Unexpired Insurance in Accounting?
Explore the accounting for prepaid insurance, a key process that converts a balance sheet asset into a recognized expense over its useful life.
Unexpired insurance is the value of an insurance policy that has been paid for but not yet used. When a business pays a premium in advance for future coverage, this prepayment is a prepaid expense. Because the coverage provides a future economic benefit, its unused portion is recorded as an asset on the company’s balance sheet, not as an immediate expense. This asset represents the amount of insurance protection that remains available.
Unexpired Insurance as a Current Asset
When a company pays for an insurance policy, the initial payment is not recorded as an expense. Instead, it is recorded on the balance sheet as a current asset, often under an account titled “Unexpired Insurance” or “Prepaid Insurance.” This accounting treatment reflects that the company has a right to future insurance coverage.
The journal entry to record this transaction increases the asset account and decreases the cash account. For instance, if a business pays $1,200 for a 12-month insurance policy, the entry would be a debit of $1,200 to Unexpired Insurance and a credit of $1,200 to Cash. This entry shows a shift in assets from cash to prepaid insurance, with no immediate impact on the company’s expenses or net income.
Adjusting Entries for Insurance Expense
As the insurance coverage period progresses, the value of the unexpired insurance asset decreases. To reflect this consumption, companies must make adjusting entries at the end of each accounting period, such as monthly. This process aligns expenses with the period in which they are incurred, a concept known as the matching principle. The adjusting entry moves a portion of the asset’s cost from the balance sheet to the income statement as an expense.
Using the previous example of a $1,200 premium for a 12-month policy, the company would recognize $100 of insurance expense each month ($1,200 / 12 months). The adjusting journal entry would be a debit of $100 to Insurance Expense and a credit of $100 to Unexpired Insurance. This entry increases the expenses on the income statement, reducing net income, and reduces the Unexpired Insurance asset on the balance sheet. This process is repeated monthly until the asset account balance is zero.