Loan Instalments to Pay Insurance

by Linda

Loan paid insurance company directly, to be paid back in instalments from bank. How to record initial loan and payment of instalments?

Need to spread expenses over time to reflect correct GST quarter. What entry to show Ins Co paid immediately yet expenses applicable to year? (Recurring or pre-paid or both).

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Hi Linda,

If I understand you correctly, you are saying you took out a bank loan to pay your insurance premiums in one lump sum payment ... and you will repay the bank loan through regular instalments.

If you take a look at my page on Common Bookkeeping Entries, you will see how to book loan proceeds that were paid out and never deposited to your bank account. The example uses an asset purchase ... so just substitute prepaid insurance in its place.

You can then book your loan repayments each time you make a payment to the bank.

In addition, you will have to post the expensing of the prepaid insurance each month.

If your GST is handled the same way as in Canada, you will account for the GST when paid, which I would guess is when the bank paid the insurance premiums. The GST paid goes directly to your balance sheet account and does not affect your income statement ... at least in Canada.

I hope I understood your situation correctly, If not, post back clarifying what you mean ... and we'll go from there.

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Nov 29, 2011
Prepaid Insurance
by: Martin, Canmore

If prepaid office insurance is $45 and is prepaid over 12 months, do I need to set up a prepaid insurance or can it be expensed?

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Martin, take time to read about an accounting concept called the materiality constraint.

It will help you decide whether you should be expensing the office insurance or recording it to prepaids.

To help you decide if the payment should be booked to prepaids, read my chat on What are prepaids expenses? to learn the correct bookkeeping treatment.

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