Proper Accounting Treatment for Insurance Premium Receipt
How should Apex Insurance Company record the receipt of $6,000 for an annual property insurance policy from one of their corporate customers?
a) Debit to cash account and credit to revenue account
b) Debit to revenue account and credit to cash account
c) Debit to expense account and credit to liability account
Answer:
The correct way to record the receipt of $6,000 for an annual property insurance policy from a corporate customer in the accounts of Apex Insurance Company is:
a) Debit to cash account and credit to revenue account
Upon receiving the $6,000 payment for the annual property insurance policy, Apex Insurance Company should debit the cash account and credit the revenue account. This accounting treatment reflects the inflow of cash and recognizes the earned income from providing insurance coverage for the year.
By recording the payment as revenue, Apex acknowledges the revenue earned through the transaction. This entry follows the basic accounting principle of recognizing revenue when it is earned. This also ensures that the company's financial records accurately reflect the financial impact of the insurance policy sale.
It is important for companies to adhere to proper accounting practices to maintain accurate financial records and comply with regulatory requirements.