Liability

[AccTaxMan]

I know this is more like an accounting question...

Suppose the renewal date of your house insurance is 12-1-2012. The premium is $1,500. You chose to pay with the installment plan offered by the insurance company. So you have paid $1,000 (50%) on 12-1-2012 and therefore you still have a $500 balance on the account. The next and final installment of the $500 is not due until March 2013. Now if you have to compile a balance sheet for yourself as of today, is the $500 considered a liability?

Note that the $500 is not past due because the insurance company has allowed you until March 2013 to pay it in an installment plan.

[ChEAr$]

I know this is more like an accounting question...

Suppose the renewal date of your house insurance is 12-1-2012. The premium is $1,500. You chose to pay with the installment plan offered by the insurance company. So you have paid $1,000 (50%) on 12-1-2012 and therefore you still have a $500 balance on the account. The next and final installment of the $500 is not due until March 2013. Now if you have to compile a balance sheet for yourself as of today, is the $500 considered a liability?

Note that the $500 is not past due because the insurance company has allowed you until March 2013 to pay it in an installment plan.

yes, it is a liability, even though not due yet. My own federal and state income taxes are not due until 4/15 you know, but as of 12/31 both are a liability, albeit under the penalty thresholds. (grin

[Nashville]

Accounting Treatment

You actually have an ASSET more so than a liability.

If your premium is $1500 annually, your insurance cost expires at $125/month.

Since you have already paid $1000, and your insurance has only one month of expiration @$125 , you actually have a "Prepaid" asset of $875.

If you prefer a "complete" accounting method, you would book the entire $1500 as a liability when the policy renewed, and then reduce it by $1000 when you paid that much toward the annual premium, so there would be $500 showing as a remaining liability. But since you recognized the entire $1500 upon renewal, and only $125 has expired, then you have $1375 still on the books as an asset.

If you prefer the second method above, you still have $1375 as an asset and $500 as a liability, hence net of $875 anyway. Maybe a CPA would best know how to present this on a balance sheet.

Either way, you have only $125 in true expense from this policy measured on the accrual basis. $1000 on cash basis, which would report neither an asset not a liability -- just the payment.

[AccTaxMan]

You actually have an ASSET more so than a liability.

If your premium is $1500 annually, your insurance cost expires at $125/month.

Since you have already paid $1000, and your insurance has only one month of expiration @$125 , you actually have a "Prepaid" asset of $875.

If you prefer a "complete" accounting method, you would book the entire $1500 as a liability when the policy renewed, and then reduce it by $1000 when you paid that much toward the annual premium, so there would be $500 showing as a remaining liability. But since you recognized the entire $1500 upon renewal, and only $125 has expired, then you have $1375 still on the books as an asset.

If you prefer the second method above, you still have $1375 as an asset and $500 as a liability, hence net of $875 anyway. Maybe a CPA would best know how to present this on a balance sheet.

Either way, you have only $125 in true expense from this policy measured on the accrual basis. $1000 on cash basis, which would report neither an asset not a liability -- just the payment.

What you said makes sense. But if that's the case, anyone who owns a house should account for the insurance premium in his/her balance sheet. Does anyone actually do it? I have been in this field for 15 years and I have never seen one single balance sheet with a house insurance premium entry in it. And for the people who have health insurance policy, do they have to account for the health insurance premium in their balance sheet too?