One of the driving reasons for P&L Statement confusion is the inconsistent chart of account recording of an insurance expense. Two things about insurance:
First, you need insurance. It is one of those costs of doing business that helps you lower the risk of being in business.
Second, however, you choose to categorize the expense each insurance policy represents be consistent in recording the premium payments.
Overview
Insurance Expense is the cost that has been incurred, expired, or used up during the current accounting period to protect the nonmanufacturing functions of a business. For those wanting a precise Gross Profit, any insurance costs incurred for direct operations are allocated to the cost of goods produced. For most businesses, this level of expense allocation is not necessary.
Typical insurance expenses cover the policy costs for Business Liability, Property, Workers Compensation, Vehicle, Product Liability, Medical, Dental, and any other related premiums paid for transferring the risk of loss from one party to another.
Another way to think about insurance is how much property damage or liability claim you could afford to pay out-of-pocket if damage or a legal claim was filed against your company. Your goal is to carry insurance to cover a claim you can’t afford to pay directly for.
When was the last time you completed an insurance coverage audit to confirm that you have the right levels of insurance? Do this to ensure you aren’t overpaying for the coverage and risk profile your business represents and that you are prepared to live with.