In December 2018, Kojak Insurance Co. received $500,000 in premiums for a two-year property insurance policy. The company recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount. An internal audit conducted in early 2019 flagged this transaction. The appropriate accounting treatment is that:

Question

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Kojak Insurance Co. should have recognized the premium revenue over the period the insurance coverage is provided, not all at once. This is an error in the initial recording of the transaction, not a change in accounting principle or estimate. Revenue recognition principles dictate that revenue is recognized as earned, and in this case, it is earned evenly over the two-year period of the insurance policy.