If a corporation pays the premium for an insurance policy that covers its employees, how should this transaction be classified in accounting?

• A. As a liability on the balance sheet
• B. As an operating expense on the income statement
• C. As a revenue item on the income statement
• D. As a capital expenditure on the balance sheet

Answer: (B)

Verified step by step guidance

1. Understand the nature of the transaction: The corporation is paying for an insurance policy that benefits its employees. This payment is considered a cost incurred during normal business operations.
2. Determine the classification: Since the payment is related to employee benefits and is part of the company's regular operating activities, it should be classified as an operating expense.
3. Identify the financial statement: Operating expenses are reported on the income statement, which reflects the company's revenues and expenses during a specific period.
4. Eliminate incorrect options: A liability on the balance sheet would represent an obligation, which this transaction is not. Revenue items on the income statement represent income earned, not expenses. Capital expenditures on the balance sheet are for long-term assets, which this transaction does not involve.
5. Conclude the correct classification: The payment for the insurance policy should be recorded as an operating expense on the income statement, as it aligns with the definition of costs incurred during normal business operations.