How is property insurance recorded in the accounts: from the annual premium to the insurance payout
The insurance premium was paid a year in advance, then materials in the warehouse were flooded. Using a metal structures workshop as an example, all the journal entries with accounts 3190, 6510, 5910 and 9390.
The "Temir Qanot" workshop makes metal gates and railings. Its head, Ulug'bek, insured the workshop equipment and the metal in the warehouse for one year. The accountant Gulnora faced two questions: is the money paid in one go an expense of this month? And if a loss occurs, where is the insurance money recorded?
First, the terms. The policyholder (here, the workshop) pays an insurance premium to the insurance company. If the risk specified in the contract occurs (an insured event), the company covers the loss with an insurance payout.
Why doesn't the annual premium become an expense in a single month?
The premium is paid for 12 months of cover. If we charged it to expenses in full in the month of payment, that month's profit would drop sharply, and the remaining 11 months would look as if they were insured "for free".
NAS No. 21 says this directly: an advance payment for annual property insurance is accounted for in prepaid expenses (3100) and is transferred to expenses over the specified period. For the workshop this is 3190 "Other prepaid expenses".
In the example: the annual premium is 12 000 000 soum, and the contract runs from 1 March. Each month accounts for 12 000 000 ÷ 12 = 1 000 000 soum. The insured property relates to production, so the monthly share is charged to 2510 "General production overhead".
What journal entries are made?
| Step | Transaction | Debit | Credit | Amount |
|---|---|---|---|---|
| 1 | Annual premium accrued under the contract | 3190 | 6510 | 12 000 000 |
| 2 | Premium paid from the bank | 6510 | 5110 | 12 000 000 |
| 3 | Every month: one month's share of the premium expensed | 2510 | 3190 | 1 000 000 |
Step 3 is repeated 12 times. At the end of the year (December), 2 months' worth, that is 2 000 000 soum, still remains in 3190: it relates to January and February and sits on the balance sheet as a current asset.
What if a loss occurs and a payout arrives?
In July the warehouse roof leaked, and metal sheets worth 5 000 000 soum rusted and became unusable. There is no responsible person. The insurance company recognised the event and, under the terms of the contract, paid an insurance payout of 4 000 000 soum.
| Step | Transaction | Debit | Credit | Amount |
|---|---|---|---|---|
| 4 | Damaged materials transferred to losses | 5910 | 1010 | 5 000 000 |
| 5 | Loss expensed because no responsible person was identified | 9430 | 5910 | 5 000 000 |
| 6 | Insurance payment (payout) received from the insurance organisation | 4510 | 9390 | 4 000 000 |
The correspondence in step 6 is given exactly like this in the table in paragraph 405 of NAS No. 21 (line 12): "Insurance payments received from insurance organisations under property insurance" — debit 4510, credit 9390. The NAS No. 21 table does not show a separate entry for the payout money arriving in the bank, so set out how to record it in the organisation's accounting policy.
Result: the loss is 5 million soum, the payout is 4 million soum, and the workshop's net loss is 1 million soum. Without insurance this figure would have been 5 million.
A reminder for Gulnora
| Situation | Which account |
|---|---|
| Monthly share of insurance on the office (administrative) building | As an administrative cost in 9420 "Administrative expenses" (paragraph 409: costs of managing the organisation; set the exact classification in the accounting policy) |
| Insurance of an asset under construction | Capital investments, 0810–0890 / 6510 |
| Insurance of production equipment and the warehouse | 2510 |
Test yourself
5 questions on this topic: pick an option or reveal the answer.
On 1 October an insurance company concluded a one-year property insurance contract and received the full premium of 24 000 000 soum. The premium is earned in proportion to the contract term (by months) (hypothetical method). What is the unearned premium as at 31 December?
A printing house insured its equipment worth 60 000 000 soum for 7 months. The annual rate is 2% of the sum insured, and the premium for a short term is calculated in proportion to the number of months (a contract condition). What is the insurance premium?
For the "Bahor kiyim" shop the annual insurance premium is 6 000 000 soum if paid in one go. Under the contract the premium may be paid in 4 equal quarterly instalments, with a 4% surcharge added to each instalment (hypothetical terms). How much is paid in total over the year when paying in instalments?
"Bodomzor kafe" paid an annual insurance premium of 3 600 000 soum in advance. After exactly 4 months the contract was terminated at the policyholder's request. Under the contract terms, 85% of the premium for the remaining period is refunded (hypothetical term). How much money is refunded?
The Yashil vodiy greenhouse insured its equipment for a sum insured of 80 000 000 soums. The insurance tariff in the contract is 1.5% of the sum insured. What is the insurance premium (the fee paid by the policyholder)?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- NAS No. 21 "Chart of Accounts", paragraphs 155–157, 160 and 161 · advance payment for annual property insurance in prepaid expenses (3100); 3190 / liability accounts; expense accounts / 3110–3190
- NAS No. 21, paragraphs 276, 277, 279 and 280 · 6510 "Insurance payments"; expense accounts / 6510; 6510 / 5110–5530
- NAS No. 21, paragraphs 75, 128, 130 and 409 · insurance related to capital investments 0810–0890 / 6510; insurance costs of production property in 2510 (2510 / 6510); costs of managing the organisation in 9420
- NAS No. 21, paragraphs 247 and 249 · 5910 / 1010–2990 (losses from damage to valuables); 9430 / 5910 when no responsible person is identified
- NAS No. 21, paragraph 405 (line 12) · insurance payments received from insurance organisations under property insurance 4510 / 9390
- Example and amounts · prepared by the author, hypothetical