When policy periods expire, the premiums written are earned and are recognized as:

Question

Options

• ALiabilities
• BExpenses
• CRevenues
• DNone of the above

• A
  6% (2)
• B
  16% (5)
• C
  74% (23)
• D
  3% (1)

Explanation

Premiums written are initially recorded as unearned premium liabilities because the insurer has an obligation to provide future coverage - but as the policy period elapses, that obligation is fulfilled, and the premium is "earned," shifting from a liability to revenue on the income statement. Option A (Liabilities) describes the initial treatment of unearned premiums, not the earned stage - so it's a common trap that confuses timing. Option B (Expenses) is wrong because expenses represent costs incurred by the insurer (e.g., claims, commissions), whereas premiums collected are money received for services rendered. Think of it this way: time turns liability into revenue - the premium starts as a debt to the policyholder (unearned = liability), and each passing day of coverage converts it into income the insurer has rightfully earned (earned = revenue).

Memory tip: Use the mnemonic "Earn it, Own it" - once the coverage period expires and the insurer has delivered on its promise, the premium is owned as revenue. If coverage hasn't been delivered yet, it's still a liability.

No community discussion yet for this question.