Every business pays money to insurance companies to protect against risks like fire, theft, or accidents. This payment is called an insurance premium. It is an expense for the business. We must record it properly in our books. That is why we need to understand the paid insurance premium journal entry.The Paid Insurance Premium Journal Entry helps track where the money went and how it affects the business. This is important because insurance helps the business stay safe. But the money spent on it is not a profit or income. It is an expense. So, we show it in our records clearly.
What is Insurance Premium in Accounting?
Every business needs to manage risk. One way to manage risk is to buy insurance. When a business pays for insurance, that payment is called an insurance premium.
An insurance premium is the amount a business pays to an insurance company to cover risks. This could be for health, vehicle, fire, theft, or life insurance. The business does not receive a product or service in return. Instead, they get a promise of help if something bad happens.
This payment does not bring direct profit. It is an expense. So, the business must show it in its accounts.
In accounting, we treat insurance premium as:
- An expense if it covers only the current year.
- A prepaid expense if it covers future years too.
When we pay the premium, it decreases our cash or bank balance. It also increases our expense for the year. That is why we use the Paid Insurance Premium Journal Entry to keep our books clear.
Importance of Recording Insurance Premium
Recording insurance premium is important for business as it helps in computing the correct profits earned after all the expenses.
- It helps calculate correct profit or loss.
- It shows real cash outflow.
- It helps during tax filing and audits.
- It helps in preparing final accounts.
So, we must record every insurance payment carefully using a correct journal entry.
Format and Examples of Paid Insurance Premium Journal Entry
Journal entries are used to record business transactions. Every entry must follow double-entry bookkeeping. The Paid Insurance Premium Journal Entry also follows this rule.
Format of Journal Entry for Insurance Premium
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| xx/xx/xxxx | Insurance Premium A/c Dr.To Cash/Bank A/c(Being insurance premium paid) | xxxx | xxxx |
Example:
Let’s say a business pays ₹5,000 as fire insurance for the year.
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| xx/xx/xxxx | Insurance Premium A/c Dr.To Cash/Bank A/c(Being fire insurance premium paid) | 5000 | 5000 |
This entry reduces the bank balance and shows the insurance expense.
More Examples:
- If paid by cheque:
To Bank A/c - If paid by cash:
To Cash A/c - If paid partly by cheque and partly in cash:
To Cash A/c and To Bank A/c
Prepaid Insurance and Its Journal Entry
Sometimes businesses pay insurance premiums for more than one year. In such cases, we cannot show the full amount as current year expense. The part that belongs to the next year is called prepaid insurance.
What is Prepaid Insurance?
Prepaid insurance is the amount paid in advance for future coverage. For example, if you pay ₹12,000 in April 2025 for insurance that covers April 2025 to March 2026, only ₹9,000 belongs to the current year. The rest, ₹3,000, is prepaid.
Journal Entry for Prepaid Insurance
We divide the payment into two parts:
Step 1: When full premium is paid
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| xx/xx/xxxx | Insurance Premium A/c Dr.To Bank A/c(Being insurance premium paid for 12 months) | 12,000 | 12,000 |
Step 2: At year-end, adjust prepaid portion
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| xx/xx/xxx | Prepaid Insurance A/c Dr. To Insurance Premium A/c (Being premium related to next year adjusted as prepaid) | 12,000 | 12,000 |
Accounting Treatment in Final Accounts
Final accounts include the trading account, profit & loss account, and Balance Sheet. Paid insurance premiums affect these accounts in a specific way.
How It Appears in Final Accounts
- Profit & Loss A/c: Insurance premium expense of the current year is shown on the debit side.
- Balance Sheet: Prepaid insurance appears under Current Assets on the asset side.
Example Table:
| Account | Affected Part | Treatment |
| Insurance Premium A/c | P&L Account (Debit) | Shows as an expense |
| Prepaid Insurance A/c | Balance Sheet (Assets) | Shows as a current asset |
| Bank/Cash A/c | Balance Sheet (Assets) | Reduced after payment |
Why This Matters
Accurate accounting of insurance ensures that:
- Profits are not under or overstated.
- Assets and liabilities are properly shown.
- Accounts stay audit-ready.
Relevance to ACCA Syllabus
In ACCA, especially under Financial Accounting (FA) and Strategic Business Reporting (SBR), students must understand the classification and presentation of expenses. Recording insurance premium payments teaches how to reflect prepaid expenses, matching concepts, and accurate financial reporting in final accounts under IFRS frameworks.
Paid Insurance Premium Journal Entry ACCA Questions
Q1: What is the correct journal entry for paid insurance premium by cheque?
A) Insurance Premium A/c Dr. To Cash A/c
B) Bank A/c Dr. To Insurance Premium A/c
C) Insurance Premium A/c Dr. To Bank A/c
D) Prepaid Insurance A/c Dr. To Bank A/c
Ans: C) Insurance Premium A/c Dr. To Bank A/c
Q2: At year-end, how is prepaid insurance treated in accounts?
A) Added to liabilities
B) Deducted from profit
C) Added to equity
D) Shown under current assets
Ans: D) Shown under current assets
Q3: Which accounting concept supports adjusting prepaid insurance?
A) Prudence
B) Matching
C) Going Concern
D) Consistency
Ans: B) Matching
Q4: Which side of the Profit & Loss account shows insurance premium expense?
A) Credit
B) Not shown
C) Debit
D) Either side
Ans: C) Debit
Q5: If part of the insurance premium covers next year, the entry is:
A) Insurance Premium A/c Dr. To Sales A/c
B) Prepaid Insurance A/c Dr. To Insurance Premium A/c
C) Cash A/c Dr. To Prepaid Insurance A/c
D) Insurance A/c Dr. To Income A/c
Ans: B) Prepaid Insurance A/c Dr. To Insurance Premium A/c
Relevance to US CMA Syllabus
The US CMA Part 1 (Financial Planning, Performance, and Analytics) syllabus includes expense management, recording journal entries, and accurate reporting. Insurance premiums, whether paid or prepaid, are part of expense tracking and internal financial control—skills vital for a cost analyst or management accountant.
Paid Insurance Premium Journal Entry US CMA Questions
Q1: How do you record the payment of an insurance premium?
A) Debit Cash, Credit Insurance Premium
B) Credit Insurance Expense, Debit Sales
C) Debit Insurance Expense, Credit Cash
D) Debit Insurance Asset, Credit Cash
Ans: C) Debit Insurance Expense, Credit Cash
Q2: Which financial statement includes prepaid insurance?
A) Income Statement
B) Balance Sheet
C) Cash Flow Statement
D) Statement of Equity
Ans: B) Balance Sheet
Q3: What type of account is Insurance Premium?
A) Capital Account
B) Nominal Account
C) Real Account
D) Contra Account
Ans: B) Nominal Account
Q4: If insurance is paid for 2 years, what portion is shown as current year expense?
A) Full amount
B) Half
C) None
D) Randomly
Ans: B) Half
Q5: Which of the following is an internal control for prepaid insurance?
A) Expensing all at once
B) Skipping recording
C) Time-based allocation
D) Grouping with assets
Ans: C) Time-based allocation
Relevance to US CPA Syllabus
Under US CPA FAR (Financial Accounting and Reporting), expense classification, prepaid adjustments, and journal entries are essential. Knowing how to record Paid Insurance Premium Journal Entry helps CPA candidates understand GAAP principles, timing of expenses, and asset recognition.
Paid Insurance Premium Journal Entry US CPA Questions
Q1: Under accrual accounting, how do you treat prepaid insurance?
A) Deferred income
B) Current asset
C) Current liability
D) Equity
Ans: B) Current asset
Q2: Which principle does prepaid insurance follow?
A) Conservatism
B) Full Disclosure
C) Matching Principle
D) Materiality
Ans: C) Matching Principle
Q3: Insurance paid for the next accounting period is recorded as:
A) Liability
B) Prepaid Expense
C) Expense
D) Income
Ans: B) Prepaid Expense
Q4: If the full premium is expensed, what is the impact on net income?
A) Overstated
B) Understated
C) Neutral
D) Increased
Ans: B) Understated
Q5: What entry adjusts prepaid insurance at year-end?
A) Insurance Expense Dr. To Prepaid Insurance Cr.
B) Prepaid Insurance Dr. To Insurance Expense Cr.
C) Insurance Expense Dr. To Cash Cr.
D) Prepaid Insurance Dr. To Bank Cr.
Ans: B) Prepaid Insurance Dr. To Insurance Expense Cr.
Relevance to CFA Syllabus
In CFA Level I, under Financial Reporting and Analysis (FRA), candidates learn expense recognition, accruals, and adjusting entries. Recording Paid Insurance Premium Journal Entry is a basic part of understanding operating expenses, current assets, and revenue-expense timing in financial analysis.
Paid Insurance Premium Journal Entry CFA Questions
Q1: Which financial metric is affected by prepaid insurance?
A) ROE
B) Gross Profit
C) Working Capital
D) EBITDA
Ans: C) Working Capital
Q2: Paid insurance premiums affect which account immediately?
A) Expense
B) Asset
C) Equity
D) Revenue
Ans: B) Asset
Q3: Prepaid insurance is classified under:
A) Non-current assets
B) Long-term liabilities
C) Current assets
D) Contingent liabilities
Ans: C) Current assets
Q4: Which part of financial statements shows insurance used this year?
A) Statement of Equity
B) Cash Flow Statement
C) Income Statement
D) Notes to Accounts
Ans: C) Income Statement
Q5: What happens to expenses when prepaid insurance is adjusted correctly?
A) They remain high
B) They reflect true usage
C) They reduce profit
D) They inflate earnings
Ans: B) They reflect true usage
