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M a commerce student.can anyone explain me this adjustment "Annual premium on insurance expiring 1st June ,2017 was 1200 " Financial accounting for the year ended 31 March 2017?
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M a commerce student.can anyone explain me this adjustment "Annual pre...
Understanding the Adjustment for Insurance Premium
In financial accounting, adjustments are made to ensure that the financial statements reflect the true state of affairs as of the reporting date. In this case, we have an annual insurance premium that is relevant to the financial year ending March 31, 2017.
Details of the Insurance Premium
- The annual premium for insurance is Rs. 1,200.
- This policy expires on June 1, 2017, meaning that part of this premium applies to the period after March 31, 2017.
Accounting Treatment
To adjust this in the financial statements:
1. Divide the Annual Premium:
- Since the premium is for one year, we can calculate the monthly expense:
- Rs. 1,200 / 12 months = Rs. 100 per month.
2. Determine the Coverage Period:
- From April 1, 2017, to June 1, 2017, there are 2 months that the insurance will cover after the reporting date.
3. Calculate the Prepaid Portion:
- For the 2 months after March 31, 2017:
- Prepaid amount = Rs. 100 * 2 = Rs. 200.
4. Recognize the Expense:
- The expense for the year ending March 31, 2017, will be:
- Insurance Expense = Total premium - Prepaid amount = Rs. 1,200 - Rs. 200 = Rs. 1,000.
Conclusion
This adjustment ensures that only the expense applicable to the financial year ending March 31, 2017, is recognized. The prepaid amount of Rs. 200 will be reported as an asset in the balance sheet for the following period. This method adheres to the accrual basis of accounting, reflecting the expenses incurred in the appropriate accounting period.
In financial accounting, adjustments are made to ensure that the financial statements reflect the true state of affairs as of the reporting date. In this case, we have an annual insurance premium that is relevant to the financial year ending March 31, 2017.
Details of the Insurance Premium
- The annual premium for insurance is Rs. 1,200.
- This policy expires on June 1, 2017, meaning that part of this premium applies to the period after March 31, 2017.
Accounting Treatment
To adjust this in the financial statements:
1. Divide the Annual Premium:
- Since the premium is for one year, we can calculate the monthly expense:
- Rs. 1,200 / 12 months = Rs. 100 per month.
2. Determine the Coverage Period:
- From April 1, 2017, to June 1, 2017, there are 2 months that the insurance will cover after the reporting date.
3. Calculate the Prepaid Portion:
- For the 2 months after March 31, 2017:
- Prepaid amount = Rs. 100 * 2 = Rs. 200.
4. Recognize the Expense:
- The expense for the year ending March 31, 2017, will be:
- Insurance Expense = Total premium - Prepaid amount = Rs. 1,200 - Rs. 200 = Rs. 1,000.
Conclusion
This adjustment ensures that only the expense applicable to the financial year ending March 31, 2017, is recognized. The prepaid amount of Rs. 200 will be reported as an asset in the balance sheet for the following period. This method adheres to the accrual basis of accounting, reflecting the expenses incurred in the appropriate accounting period.
Community Answer
M a commerce student.can anyone explain me this adjustment "Annual pre...
Annual premium are paid for a year. so a insurance premium taken in 1st June 2016 to 1st June 2017 in the financial year ending 31st march 2017 which mean insurance of 3 month are prepaid. so prepaid insurance =1200/12*3=300 will be subtracted from insurance and will be shown on asset in balance sheet as current asset
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