How to Account for Insurance Proceeds

Natural disasters are just one item that can cause a business loss.

If your business receives insurance proceeds due to a loss claim, you need to properly account for the insurance proceeds on your accounting general ledger. Because insurance claims are usually uncommon occurrences, all costs associated with the loss and proceeds received to offset the loss should be recorded in the extraordinary income and loss section of the general ledger in order to separate those financial transactions from normal business operating transactions.

Things You'll Need

• Accounting general ledger
• Insurance proceeds amount

Instructions

1. Create a general ledger account in the extraordinary income and loss section of the general ledger to contain financial transactions associated with the loss. Name the account according to the type of loss incurred so that you know immediately what the amount represents. For example, you may name the account "Water Damage" or "Automobile Accident."

2. Review the check received from the insurance company to ensure it is for the correct amount. In certain cases, if you sign and deposit the check from the insurance company, you are legally agreeing that the amount of the check is settlement in full, and you have no recourse to get more money from the insurance company. If the check is not for the correct amount, contact the insurance company and request another check.

3. Deposit the check into your regular business operating account. Keep a copy of the check for your records.

4. Record an increase to the business checking account in the accounting general ledger for the exact amount of insurance proceeds deposited.

5. Record a decrease to the loss account created in Step 1 for the exact amount of insurance proceeds deposited.

6. Record expenses paid for the loss repairs as an increase to the loss account. The insurance proceeds will offset the loss repair expense to the extent that the loss was covered by insurance and leave the uncovered balance as the net expense in the account.

Tips & Warnings

• If you are not sure how to properly account for insurance proceeds received for a loss claim, hire an accounting consultant to assist you with the journal entries.

References

• "Principles of Accounting"; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991