Here are the details. It's the end of the year, June 30th, we've got an insurance invoice received sometime in the last week of June, but it's for July's premium. It's due by mid July. Since it's insurance, there's a contractual obligation as agreed upon when we decided to go with them. How do would I record this obligation? I can't book it as an expense. Thanks in advance.
Recording a future liability for insurance
Answers
You can't control the date they put on the invoice. If the coverage period is for July, why would you book it in June?
I'd enter it in July AP, expense it immediately* and pay it by July 15.
*-I presume the premium is just for the month.
Matching concept.
That is what I normally would agree with, but does the fact that this would be considered a contractual obligation change when the liability should be recognized?
I've read elsewhere on proformative regarding a similar situation with an annual insurance premium, where some have suggested to dr prepaid expense and cr accounts payable in order to recognize the liability as of the date of invoice even though it hadn't been paid for yet.
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Anon-that seems to inflate both prepaids and AP. Not sure that's necessary.
And, Emerson asks relevant questions too :)
Let me ask you something and maybe it will clear things up ..... In reference to your "it is for July's premium" statement, Is your "contractual obligation" on a monthly basis? If your basis is "contractual obligation", should you not recognize the year's worth? Do you intend to do this for ALL other "obligations"? say...cell phone monthly charges with the usual 2 year contracts?
BTW, I second Len's advice. I would add materiality as a factor.
Posting to a prepaid account and expensing monthly can make sense if you are billed on less than a monthly rate, in our case we receive 10 invoices for our annual insurance policy. We simply book each payment to a prepaid asset and recognize a month's worth of expense as part of the closing process.
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I agree with Erik. The most appropriate action is to post to Prepaid and AP even if you choose not to book the liability in July. However, I also need to ask what you did in prior year ends. Will there be no insurance expense or double interest expense in the year just completed. This is a new year expense so the expense should be recorded in the new year.
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