Is an Insurance a Liability or an asset?

[Vishal Hegde]

Is an Insurance a Liability or an asset??

[Seetharaman Venkatasamy]

Liability for a Bank and Asset for a User/You.

[Tim Moores]

Definitely.

[Vishal Hegde]

Then in that terms House is not an asset for us ...its a liability as cash keeps on flowing out because of the expense and maintainence

[Seetharaman Venkatasamy]

Vishal Hegde wrote:Then in that terms House is not an asset for us ...

It depends buddy... house under loan and house under your *own* name make the difference

[Vishal Hegde]

Hi,

But asset means cash is coming in

and Liability means money is going out how come House is an asset in that case when you have to pay maintaince tax etc for your house

[Martin Vashko]

This might help.

Nothing there suggest an asset may not need some maintenance and therefore money (or time) being spent on it.

[Matthew Brown]

Vishal Hegde wrote:
But asset means cash is coming in

You sure? I'd think an asset was anything that had value to you. If you want to speak in purely financial terms, then an asset would be something that could potentially have financial value to you. But I don't see there has to be a current cash flow. Would you not call a stack of gold bars that you own an asset? But unless you sell them there's no cash flow.

In terms of a house, the house itself is definitely an asset, but you may choose to spend money to maintain the value of that asset. There may also be some liabilities that go along with it (e.g. council tax in this country) but on the whole it's an asset. If you have a mortgage taken out against it, then that is a liability.

[Seetharaman Venkatasamy]

Matthew Brown wrote:I'd think an asset was anything that had value to you.

++ .
(luckily you asked this question here friend. if you ask this question to bank/customer care service , you might be a liability to them ;) ) .

[Bear Bibeault]

42

[Pat Farrell]

Vishal Hegde wrote:But asset means cash is coming in

Not at all. Go look it up. An asset is cash or a thing that has value that you control.

You simply take the value of the asset, subtract any liabilities, and get the equity. This is a definition, taught in any accounting 101 class.

A house is an asset, period. A mortgage is a liability for you (the home owner) and an asset for the bank. If the mortgage is the same size or larger than the value of your house, the equity may be negative.

[Greg Charles]

Are we really talking Accounting 101 here, or is there something deeper going on? If basic accounting, then:

Insurance is an expense
If you've prepaid insurance for any periods after the current accounting period, that's an asset.
If you owe money for insurance for any periods before or including the current accounting period, that's a liability.

So, if it's December 2012, and I pay cash for fire insurance for my office for the year 2013, then I debit my cash asset, and credit my pre-paid insurance asset. That means there is no net change to my profit for this transaction. It just converts one asset to another. In each accounting period of 2013, I debit a portion of the pre-paid insurance asset and credit insurance expense. My profit for that period will be reduced by the amount of the expense.

(I think I'm using debit and credit right, but that part has always confused me.)

[Pat Farrell]

Greg Charles wrote:Are we really talking Accounting 101 here,...
(I think I'm using debit and credit right, but that part has always confused me.)

Debit on the left, credit on the right. Period. Same for all accounts. Been this way since the 16th century monks invented double entry bookkeeping.

The concept of "insurance is an expense" is not accurate. When you buy an insurance policy, you are committed to pay for it. Perhaps all at once, perhaps over time. The policy itself is an asset to you, and the payment stream is a liability. They balance. Which is what double entry bookkeeping is all about.

[Greg Charles]

Pat Farrell wrote:

Greg Charles wrote:Are we really talking Accounting 101 here,...
(I think I'm using debit and credit right, but that part has always confused me.)

Debit on the left, credit on the right. Period. Same for all accounts. Been this way since the 16th century monks invented double entry bookkeeping.

Yes, but left and right of what? I suppose you must mean the general journal since it would definitely be wrong for a balance sheet. All assets are on the left there by convention, and if you transform one asset into another, like when you use cash to buy inventory, or prepay for insurance, there is one debit and one credit. Both affect the left side. I agree though that if you can figure out which half of your double entry is the left and which is the right, then you will also know which is called a debit and which a credit.

I'm less in agreement on your explanation of insurance expenses. Insurance absolutely is a business expense, and should be counted as such in the accounting period for which it applies. Here's a simple example that shows how it works, under An Example of Deferred Expense. This example also demonstrates that I did, in fact, mix up my debits and credits (dammit).

[Pat Farrell]

Greg Charles wrote:Yes, but left and right of what?

of the ledger. A ledger is T shaped, with a horizontal line at the top, and a vertical line going down the page.

Assets - liabilities = equity.

By definition. No need to worry about right or left.

One common misunderstanding is that the terms "asset" and "liability" along with "debit" and "credit" are technical terms, they do not represent any sort of value judgement. For some views, having lots of liabilities is good. For other, its bad. Ditto Assets.

[Greg Charles]

Ah, but my point is for a given transaction, you have to know what you're doing to put everything on the right (correct) side of the ledger. So, you buy insurance, is it cash left, insurance right, or the other way around? Answer: insurance left, cash right, but I find that hard to remember ... at least when I haven't thought about it for awhile.

Usually, that formula is expressed Assets = Liabilities + Owners Equity, just because L and OE are together on the right side of the balance sheet. Is that supposed to help me remember debits from credits? I'm not seeing how.

It's true that debit and credit may not have the same meaning in accounting as they do in general parlance. Debit sounds like taking something away, while credit sounds like adding it, but with this insurance example, we saw it's exactly the opposite. If we were paying off a loan though, then debit and credit would match the general parlance. So, I'm with you on that one. However, the idea that having lots of assets might be bad or lots of liabilities might be good ... well, you're losing me there.

[Pat Farrell]

Greg Charles wrote:Usually, that formula is expressed Assets = Liabilities + Owners Equity, just because L and OE are together on the right side of the balance sheet. Is that supposed to help me remember debits from credits? I'm not seeing how.

Arithmetic works even in accounting.

A - L = E
is the same as
A = L + E

Debits and credits have nothing to do with Assets and Liabilities.

[Greg Charles]

Seems like we're talking at cross purposes, so I'll bow out here.

[Frank Silbermann]

I once tried to read my brother's Accounting 101 book and never got past the first chapter. It's pretty intuitive that Capital = Assets - Liabilities. I.e., your net worth is the difference between your assets and your liabilities -- Assets and Liabilities being fundamental numbers, and Capital being a computed result. But the book gave the equation:

Assets = Capital + Liabilities

Yes, I suppose mathematically you can rewrite the equation, but you don't compute that way. I couldn't get my head around how a Liability could be an Asset! "You mean if someone sues me and wins, so I owe him money, that's an Asset to me???

No, because if someone sues me and wins, my capital is thereby reduced. My assets remain the same until I pay him off, and which point they are reduced.

But why, oh why couldn't the book give the equation in the way that made sense?

[Greg Charles]

Well, as I said, that's because the balance sheet is laid out that way, Assets on the left, and Liabilities and Owners' Equity on the right. The way I look at it is this: if you have something, you either own it or owe it to someone else. Have = asset, own = equity, owe = liability. Balance. It's almost zen-like.

Did they call owner's equity capital? That seem weird, because you can borrow capital, like from a bank. It's not a synonym for equity.

[Frank Silbermann]

Greg Charles wrote:Well, as I said, that's because the balance sheet is laid out that way, Assets on the left, and Liabilities and Owners' Equity on the right. The way I look at it is this: if you have something, you either own it or owe it to someone else. Have = asset, own = equity, owe = liability. Balance. It's almost zen-like.

Did they call owner's equity capital? That seem weird, because you can borrow capital, like from a bank. It's not a synonym for equity.

Equity was what I meant.

[Pat Farrell]

Greg Charles wrote:Did they call owner's equity capital? That seem weird, because you can borrow capital, like from a bank. It's not a synonym for equity.

Typically, when a company is founded, the owners put in cash. That is equity.

No one has been able to borrow capital from a bank in years. Definitely not since 2008's great crash, and realistically not since before the dot.com.boom.

[Greg Charles]

Credit is surely harder to come by these days, but you can't mean that business loans have become non-existent?

[Pat Farrell]

Greg Charles wrote:Credit is surely harder to come by these days, but you can't mean that business loans have become non-existent?

Pretty much. What used to be normal, say getting a loan to expand, just doesn't happen.

And the IPO market has died due to Sarbanes/Oxley.

[ritu attri]

For me Insurence is a Liability.

To understand this better, you should learn - what is liability insurance?
This form of risk management policy extends the coverage to individuals, and other entities in order to cover the injury or damage incurred to them.

[Pat Farrell]

ritu attri wrote:For me Insurence is a Liability. To understand this better, you should learn - what is liability insurance?
This form of risk management policy extends the coverage to individuals, and other entities in order to cover the injury or damage incurred to them.

@ritu, that is actually a completely different issue, as "liability insurance" is a type of insurance. Other types of insurance are death insurance (usually called life insurance) or health insurance (which is really sickness insurance)

I could normally call holding a policy of any type of insurance to be an asset to the person.

[eileen keeney]

Once the thing I am insured against happens, then it is an asset.

[Pat Farrell]

eileen keeney wrote:Once the thing I am insured against happens, then it is an asset.

more precisely, then its a receivable.

[Hrishikesh Maluskar]

Insurance is an asset because we get all the money we paid plus bonus and loyalty additions on maturity as well as death.

Insurance is a good solution to reduce your spending and start saving your money by paying monthly premiums.

Keeping all the money in banks does not offer death benefits to your loved ones but insurance does.

It also helps in tax exemption.

Visit this site for more details -> www.licexpadvice.com OR send mail to [email protected]

[Tim Holloway]

Hrishikesh Maluskar wrote:Insurance is an asset because we get all the money we paid plus bonus and loyalty additions on maturity as well as death.

Insurance is a good solution to reduce your spending and start saving your money by paying monthly premiums.

Keeping all the money in banks does not offer death benefits to your loved ones but insurance does.

It also helps in tax exemption.

Visit this site for more details -> www.licexpadvice.com OR send mail to [email protected]

That's not "insurance", that's an annuity. And unless it's a required business expense, you generally don't get tax deductions on insurance. April 15th is mercifully behind me for another year, but I seem to recall that the only homeowner's insurance that can be deducted off US federal income tax is Private Mortgage Insurance (PMI) required by the mortgagor.

So I think I'd reconsider before responding to your advertisement.