Quick Tip #3: How Much Cash You Really Have!
September 23, 2020
Quick Tip #5: Understanding Liabilities
September 29, 2020
Our team at Next Level Solutions often sees small businesses make the same mistake when it comes to accounting for insurance. It’s a simple fix that can make a big difference in understanding your monthly expenses and managing your finances more effectively.
The Common Mistake
Many businesses finance their insurance policies, starting with a down payment and continuing with monthly payments. However, what we often see is that companies incorrectly code these payments directly to expenses. While this might seem straightforward, it doesn’t accurately reflect the true cost of your policy over time.
The Proper Approach
To ensure your books are accurate, start by separating out the liability portion of your insurance payments. Instead of expensing the full payment each month, record the actual cost of the policy as a prepaid expense. This method allows you to amortize the policy’s cost over its coverage period, creating a consistent monthly expense.
For example, if your policy covers 12 months, divide the total cost evenly across those months. Match each month’s expense to the period it covers, which provides a clearer picture of your operating costs.
Why It Matters
Accurate insurance accounting not only helps you understand the real cost of your policy but also ensures that your financial records reflect your business’s true financial position. By separating the liability, recording principal and interest payments, and properly amortizing the policy, you’ll have cleaner books and better insights into your cash flow.
At Next Level Solutions, we’re here to help you master the financial basics that make a big impact. With a little adjustment, your insurance accounting can go from a common mistake to a model of financial clarity. Start implementing this method today to take control of your expenses!