While solving one question about Journal entries, I came across this question:
My doubt is, rather than doing the Journal entry as given, can't we do it directly? Like this way:
Bank A/c ----------> 50,000 (Dr.)
To Fire Premium A/c ---------> 10,000
To Motor Premium A/c -------> 30,000
To Marine Premium A/c -----> 10,000
What is the difference between both methods?
The entry can also be done directly but it would result in less control I think.
Practically, in case of insurance, cash deposit (CD) account is maintained in to which payments are first transferred and policies are generated by the insurance company thereafter using the balance in the CD account. This is because insurance policies are generated only after receipt of premium.
If Cash Deposit A/c (Premium Controll A/c in this case) is maintained, then Cash being a Real account, then there should also be an entry for Debiting this account (i.e. Cash comes in to the insurance company) insted of only Credit of Cash Deposit (or Premium Controll)
Cash deposit that I explained is from the perspective of insured. For insurance company, such transactions are advance receipts under current liabilities.
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