A basic insurance journal entry is Debit: Insurance Expense, Credit: Bank for payments to an insurance company for business insurance.
Not all insurance payments (premiums) are deductible* business expenses.
Some insurance payments can go on to the Profit and Loss Report and some must go on the Balance Sheet.
So when it comes to entering these transactions into the bookkeeping records of a business there are different journal entries to consider.
There are various types of insurance cover available to small businesses and business owners so we'll have a look at those and how best to treat them in the accounts.
Plus, there are questions I received from real bookkeepers/business owners who needed to know how to enter their insurance proceeds from property damage to which you can read my answers.
*A deductible expense is one that can be included in your income tax calculations.
An insurance expense occurs after a small business signs up with an insurance provider to receive protection cover.
The insurance provider charges an annual fee, called a premium, which will cover the business for 12 months.
This annual fee can be paid with a one-off payment or it can be spread over 12 monthly payments, or sometimes fortnightly.
The annual payment is usually cheaper than the total of the monthly payments as an incentive to pay the bill up-front, but small businesses often can’t afford this, so the providers offer the monthly option.
Here are some common types of insurance that are recommended for a business depending on the type of business they operate.
All of these have the same insurance journal entry:
This insurance can also be known as public liability insurance and protects against financial loss resulting from other people’s property damage, injuries to people and medical costs, lawsuits and more.
This insurance can also be known as professional indemnity insurance and is suited for businesses providing a service. It protects against financial loss resulting from errors or negligence.
These include commercial property cover, product liability cover and employee cover.
Some insurances may be compulsory like Worker’s Compensation, Commercial Auto and Professional Liability.
The Small Business Administration, USA has more information on Business Insurance.
A business that owns motor vehicles will require insurance cover on those.
The recommendation is to group this insurance with the other motor vehicle expenses (fuel, r&m) in the bookkeeping accounting records.
So, the vehicle insurance journal entry is:
With the right bookkeeping software, the bookkeeper can open sub-accounts under the Motor Vehicle expense account like this:
Motor Vehicle Expenses (Main expense account)
Vehicle Repairs & Maintenance
A sole proprietor or trader who uses their personal vehicle for business activities needs to select the right type of insurance based upon the type of activity - are you driving yourself to an appointment (the individual insurance may cover you) or are you transporting people for a charge (then you will probably require commercial auto insurance)?
Your individual vehicle insurance may not cover your business use of your personal vehicle. Here is some more information by The Balance SMB.
Individual vehicle insurance is not a deductible business expense so the insurance journal entry for individual vehicle insurance, if paid out of the business bank account is:
However, you can then reclaim a portion of that as a business expense when you calculate your deductible vehicle expenses based on the business use of your personal vehicle.
The journal entry for this is:
Capital is the account used for showing how much personal money is used by the business owner to pay for business expenses. It can either be deposited into the business bank account and coded to Capital or presented by a journal like the one above.
Business owner/s may have the following personal insurances:
The insurance journal entry for business owners is:
The above journal is only used when the business pays for the owner’s personal insurance out of the business bank account.
If the business pays for the insurance out of the business bank account and then the owner repays the business, here are the insurance journal entries:
If the business owner pays for their insurance with their own money, then nothing gets entered to the business bookkeeping records.
Accountingcoach.com has a good example of accounting for payroll withholdings for health insurance.
I have entered their figures into the free bookkeeping software called Manager so you can see the insurance journal entry in action.
Credit $75 to the Insurance Expense (expense account) for Employee's Withholding
Debit $75 to the Insurance Expense (expense account) for the Payment
Credit $75 to the Employee Withholdings Insurance (liability account) for the Withholding
Debit $75 to the Employee Withholdings Insurance (liability account) for the Payment
If the insurance provider pays personal insurance proceeds (like life insurance due to the death of an insured loved one) into your business bank account (because that’s the account you gave them or because that’s where you deposited the check as a sole proprietor), then the journal entry in the business bookkeeping records will be:
If you need to draw that money (or some of the money) out of the business for personal use, the journal entry will be:
When a business puts in an insurance claim to their provider for damages, the provider will pay money to help them cover the costs of repairing or replacing what was damaged (this is just one example).
These types of payments are called proceeds.
The above journal uses the Other Income account to show it is not part of the normal day to day activity income earned by the business.
Another insurance journal entry for proceeds is:
This journal would be used if your business has paid or will be paying a contractor to repair something.
You can see from the above insurance journal entry that the proceeds have been placed into an expense account; this is because it puts the check back into the same account that the original repair payments were made from.
In accounting it is perfectly acceptable to put money received into an expense account to offset (reduce) the original expense.
For repairs to motor vehicles the insurance journal entry for proceeds will be similar:
There are other ways of dealing with insurance proceeds especially when it comes to inventory - Investopedia explains how to account for that here or high value assets of a business such as buildings like in Question 2 near the end of this article.
When you are tracking accounts payable your insurance journal entry will be different to the ones shown further up this page.
When you receive the bill from the insurance provider the journal will be:
Then paying the bill:
In your bookkeeping software you will enter the full cost shown on the bill at the date of the bill. This full amount will go on to the Profit and Loss at that date.
When payment is made, either in full or with monthly payments, the bill will decrease, which means the accounts payable account will decrease.
Once again I have entered an example into the free bookkeeping software called Manager.
The example is a bill of $1,000 for General Liability insurance and then two payments of $84.
Enter Insurance Bill - Debit: Insurance Expense, Credit: Accounts Payable
Two Payments Against Bill - Debit: Accounts Payable, Credit: Bank
An employee of our small business damaged our property with her car. The business paid to have the damage repaired and later the employee reimbursed the business with a check from her insurance company. What GL account should this reimbursement go into so that it is not considered income?
You can put the insurance check back onto the same expense account that the original repairs were coded to which will offset that expense.
It is acceptable to put money received into an expense account when it makes sense to do so, as it does in this instance.
So, if you originally put the repairs against a Repairs & Maintenance expense account, that is the account you will put the insurance proceeds against.
Here is an article by valuesdrivenresults.com which explains it.
The journal entry is:
I am doing the books for a small property management co. The building suffered water damage. The owner received a check from the insurance company. He will now use that to make repairs. How do I book these transactions?
I was thinking:
For the damage:
For the Insurance Check
When we pay for the repairs:
What do you think?
I recommend checking with your client’s tax accountant because of the complexities around high value assets and costly damages.
In the meantime, your journals look logical and should make the events clear for anyone to follow.
The Damage/Exp is offset with the insurance check which is fine.
Something to keep in mind is if these two entries are in different months.
If you use an expense account, the P&L will show a huge loss in one month (from the damage) and then a huge profit in the month that the insurance check is received.
I recommend avoiding doing this because these journal entries won’t give your client a true picture of their day to day results.
Instead, use an account on the balance sheet for both entries.
Here are the journal entries that could be done:
For the Damage:
For the Insurance Check:
When we pay for the repairs:
Another thing to watch for is if the repair costs come to less than the insurance check (unless the insurance company has paid the exact repair quote) - the difference will have to be recorded as income - Insurance Gain - on the P&L.
Here is the insurance journal entry for the insurance check, the credit side is split between two accounts:
I am sure if the Accountant wants to change anything, adjusting journals can be done. But in the meantime, these entries will keep the books looking good.