Under the accrual basis of accounting, insurance expense is the cost of insurance that has been incurred, has expired, or has been used up during the current accounting period for the nonmanufacturing functions of a business. (The insurance costs incurred for manufacturing operations are allocated to the goods produced.)
To illustrate insurance expense, let's assume that a service company has insurance policies for its property, general liability, vehicles, and employees' worker compensation, medical, dental, life, and disability. The company pays the premiums on the various insurance policies in advance. Any insurance premium costs that have not expired as of the balance sheet date should be reported as a current asset such as Prepaid Insurance. The costs that have expired should be reported in income statement accounts such as Insurance Expense, Fringe Benefits Expense, etc. Here's a recap for the cost of insurance at a nonmanufacturing business:
- Expired insurance premiums are reported as Insurance Expense.
- Unexpired insurance premiums are reported as Prepaid Insurance (an asset account).
A manufacturer will report on its income statement the insurance expense incurred for its selling, general and administrative functions. However, the insurance costs associated with the manufacturing function will be included in the cost of the current period's output. Any prepaid insurance costs will be reported as a current asset.
