Expert: Arthur Naman - 12/19/2009

Question
QUESTION: Dear Sir, good day to you.
It's regarding company accounting transaction/entry, i handle account for our company.
I locate in Asia, our company do buy insurance for staffs. When pay to insurance company, i did entries below : --
Dr. Insurance Expense (P/L)
Cr. Bank
But we got 1 staff resign therefore Insurance company needs to refund back the premium. When i received the Credit Note from Insurance company, what kind of entry i need to do ?
I was thinking of : --
Dr. Prepaid Expense (B/S)
Cr. Insurance Expense (P/L)
(Remark : We hadn't received refund yet, it takes about 1 month)
After received the refund, i'll do entry below : --
Dr. Bank
Cr. Prepaid Expense (B/S)
Am i right ? If not, awaiting for your advices.

ANSWER: The account "prepaid expense" account is used in an accrual system; as you are expensing the payment when incurred by debiting the insurance expense account, it is apparent you are on the cash basis system, not accrual.

I would suggest a receivable account titled something like "insurance refund receivable." Other than that I have no problem with your series of transactions.

---------- FOLLOW-UP ----------

QUESTION: Dear Sir, good day to you.

Understood with your suggestion. Thank you.

As for your information, our account is based on accrual system, because the insurance cover period from JAN to DEC 2009, that's why i put : --
Dr. Insurance
Cr. Bank

Due to it's current year expense (A/C Closing FYE 2009). Am i do it right ?!


Answer
Then what you should do is to debit a prepaid expense account when the payment is made (and credit cash), then credit the prepaid account and debit the insurance expense account each month.

Regarding the refund, at the time you receive the refund notice, credit the prepaid insurance expense account referred to above and debit refund receivable. Then when the refund is received, credit the receivable account and debit cash.

You will also have to recalculate the monthly expense write off of the prepaid account.