When the full insurance premium is submitted with the application, which journal entry should be recorded by the company?

• A. Debit Accounts Receivable; Credit Insurance Revenue
• B. Debit Cash; Credit Unearned Revenue
• C. Debit Unearned Revenue; Credit Cash
• D. Debit Insurance Expense; Credit Cash

Answer: (B)

Verified step by step guidance

1. Understand the nature of the transaction: When the full insurance premium is submitted with the application, the company receives cash upfront for a service (insurance coverage) that will be provided in the future. This creates a liability for the company, as it owes the service to the customer.
2. Identify the correct accounts: Since cash is received, the 'Cash' account will be debited to reflect the increase in the company's assets. The company also incurs a liability because the service has not yet been provided, so the 'Unearned Revenue' account will be credited to record this obligation.
3. Recall the accounting principle: Unearned revenue is a liability account because it represents money received for services not yet performed. This aligns with the accrual basis of accounting, where revenue is recognized only when earned.
4. Construct the journal entry: The journal entry should debit 'Cash' to increase assets and credit 'Unearned Revenue' to increase liabilities. This reflects the receipt of cash and the obligation to provide future services.
5. Review the options provided: The correct journal entry is 'Debit Cash; Credit Unearned Revenue,' as it accurately reflects the transaction's impact on the company's financial statements.