Question

All India Insurance Company received an insurance premium of Rs 50 lacs on an insurance policy whose coverage extends till the mid of the next accounting year.

Answer 1

All India Insurance Company received an insurance premium of Rs 50 lacs on an insurance policy whose coverage extends till the mid of the next accounting year.

Discuss the treatment of of this payment in the books and disclosures in the financial statements, as on 31st March 2020

Step-by-step explanation:

• Unearned revenue is money  that is received from any customer for work which is yet to be done or completed. This is an advantage from a the perspective of cash flow for the seller (insurance company), who would now have the cash to perform the needed services. Unearned revenue is a liability therefore the initial entry - we must debit the cash account and credit the unearned revenue account.

Cash Account ...Dr

To Unearned Revenue Account ....Cr

• As the company earns the revenue, the unearned revenue balance decreases (by debiting it) and the revenue account balance increases (by crediting it). The unearned revenue account is generally  shown as a current liability in the balance sheet.

• If a company does not show the unearned revenue as state above and recognise it all at once, profits and revenues would first be overstated, and later understated for the balance periods at the time of which the profits and revenues should have been recognised. This is would be a infringement/violation of the matching principle, because the revenues are being recognised all at once, whereas the associated expenses are not being recognised