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CASE:
1. Financial Year is Jan-XX to Dec-XX
2. Medical Insurance Annual Policy is from Jul-XX to Jun-XY
3. Total Value of Policy being SR120,000.00 payment terms being50% at inception and50% after six months
4. Insurance Invoice of SR120,000.00 is recorded on01-July-XX by Debiting Prepaid Insurance and Crediting INSURANCE CO for SR120,000.00
5. Payment of SR60,000.00 at inception is made
6. On31-Dec-XX Prepaid Insurance Ledger Balance stands at SR60,000.00 & Insurance Co. has a credit balance of SR60,000.00
Now about Point (6) think below factors:
· SR60,000.00 in Prepaid Insurance is actually to be paid on01-Jan-XY
· SR60,000.00 in Insurance Co. Ledger is the liability against the Insurance Exp for first Half of the next year XY
Hence do you think, Prepayments & Liabilities for Year XX is overstated?
If YES, Suggest solution!
If NO, Please enlighten!
The answer is No. It is not overstated.
Justification:
Insurance invoice was recorded/debited to prepaid control account as a balance sheet item and therefor it didn't impact the P&L.
As stated above the closing balance for prepaid insurance as on 31st Dec XX is SR 60 K which is correct after utilizing the six months insurance expenses ( 6*10).
with respect to the credit balance to the insurance company , that is also reflected correctly as the balance amount SR 60 K will be due only in the next year and the 50% initial payment has been made already.
- SR60,000 in Prepaid Insurance is to be transferred to Profit & Loss A/c/Income statement in next year.
- SR60,000 in Insurance Co. (Creditor) should be paid-off by crediting Bank/Cash A/c.
I can't see any overstatement, if you believe in IFRS/GAAP and Accounting principles.
