At the completion of the audits of policies, when the actual amount of _________________ is known, companies are required to adjust the estimate through the revenue accounts.

Question

Options

• AEarned and billed Premiums
• BUnearned but billed Premiums
• CEarned but Unbilled Premiums
• DUnearned and Unbilled Premiums

• A
  16% (10)
• B
  5% (3)
• C
  72% (46)
• D
  8% (5)

Explanation

Earned but Unbilled Premiums (C) is correct because auditable insurance policies - where the final premium depends on actual exposure data like payroll or sales - generate premiums that have already been earned (coverage was provided) but not yet billed (the audit invoice hasn't been issued). The insurer carries an estimate on the books throughout the policy, and once the audit concludes and the real figure is known, the difference must be run through revenue accounts to reflect reality.

Why the distractors fail:

• A (Earned and Billed): Already invoiced and recorded - there's no estimation phase requiring adjustment at audit completion.
• B (Unearned but Billed): These represent premiums billed for future coverage; they're a liability, not a revenue-adjustment item tied to audit completion.
• D (Unearned and Unbilled): Premiums not yet earned and not yet billed have no revenue recognition event yet - they can't be adjusted through revenue accounts because coverage hasn't occurred.

Memory tip: Link the two words to the audit timeline - Earned (the policy period already happened) + Unbilled (the audit invoice is still pending). Audits are needed precisely because the bill can't go out until the actual exposure is measured, making "Earned but Unbilled" the only pairing that logically requires a revenue true-up when audit figures land.

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