Example of a Group B account using Workers Compensation
The Workers Compensation premium renews on January 1st. On December 15th you accept a new policy from your insurance provider. The total policy premium is based on $500,000.00 of labor with the following break down:
| Portion | Amount |
|---|---|
| $375,000.00 Service Worker labor @ 5.75% = | $21,563.00 |
| $125,000.00 Sales labor @ 1.75% = | $ 2,187.00 |
| $150,000.00 Clerical labor @.90% = | $ 1,350.00 |
| Total Premium | $25,100.00 |
On January 1st, the following General Ledger Adjusting Journal Entry is made to reflect the liability of this premium.
| GL# | Description | Debit | Credit |
|---|---|---|---|
| 1350 | Prepaid Insurance | $25100.00 | |
| 2100 | Accounts Payable Insurance | $25100.00 |
You will pay 10 monthly installments, the first installment is a 20% down payment and then equal installments for the remaining 9 months.
| Installment | Amount |
|---|---|
| 1st installment | $5020.00 |
| 2nd - 10th installment | $2231.11 |
1st invoice
| GL# | Description | Debit | Credit |
|---|---|---|---|
| 2100 | Accounts Payable Insurance | $5020.00 | |
| 2000 | Accounts Payable Trade | $5020.00 |
2nd - 10th invoices
| GL# | Description | Debit | Credit |
|---|---|---|---|
| 2100 | Accounts Payable Insurance | $2008.00 | |
| 2000 | Accounts Payable Trade | $2008.00 |
The Tax Allocation Program creates the following entries to the General Ledger by Job
| GL# | Description | Debit | Credit |
|---|---|---|---|
| 4280 | Operations Worker Comp Expense | $1796.91 | |
| Sales Worker Comp Expense | $182.25 | ||
| Administration Worker Comp Expense | $112.50 | ||
| 2300 | Accrued Workers Comp | $2091.66 |
To reduce the Prepaid insurance account and the Accrued Workers Comp, create a Recurring AJE for 1/12 of the annual premium. The AJE is as follows:
| GL# | Description | Debit | Credit |
|---|---|---|---|
| 1350 | Prepaid Insurance | $2091.67 | |
| 2300 | Accrued Workers Comp | $2091.67 |
Since the annual premium is based on estimated payroll dollars and the amount the Tax Allocation program expense is based on actual payroll dollars these amounts will usually be different. The reason they might be different is due to increases or decreases in actual payroll dollars for each month throughout the policy year.
An Alternative Method which does not include the Booking of the Prepaid Insurance and Accounts Payable Insurance accounts:
The Journal entries involving the Prepaid Insurance account are not totally necessary if your company does not want to book the full premium amount at January 1st into your General Ledger.
If you do not want to show the entire premium amount at the beginning of the year in the General Ledger, the sample entries showing the January 1st Adjusting Journal Entry and the Recurring Journal entry accruing 1/12 of the annual premium each month need not be entered.
Instead, you could make your Installment payments debiting the Accrued Workers Comp account. In our example, this would be G/L Account #2300. This is the same account that is credited when the Tax Allocation program runs.
The entries would look like this:
1st Invoice
| GL# | Description | Debit | Credit |
|---|---|---|---|
| 2300 | Accrued Workers Comp | $5020.00 | |
| 2000 | Accounts Payable Trade | $5020.00 |
2nd thru 10th Invoices
| GL# | Description | Debit | Credit |
|---|---|---|---|
| 2300 | Accrued Workers Comp | $2008.00 | |
| 2000 | Accounts Payable Trade | $2008.00 |
At the end of the year, the balance left in this account can be analyzed at the time of your Workers Comp audit. You may receive a kick back from your insurance audit, or you could be requested to pay additional funds.