How to Account for Insurance Losses

Insurance claims need to be properly accounted for on your books.

Insurance losses on property are not all that common, especially at the small-business level. So when they do occur it is sometimes difficult to remember, or know, what steps to take to properly recognize the net expense on your income statement. It is important to know what to do and to maintain the proper documentation, as anybody from auditors to insurance companies to your accountant will be looking at how you account for insurance claims on your books.

Things You'll Need

• Proper expense documentation

Instructions

1. Create an insurance loss account as an expense classification in your accounting software system. This account is usually named something like "Loss (Income) From Insurance Claims," as not all insurance claims result in losses on the income statements. It is sometimes possible for insurance proceeds to exceed the cumulative expense on the loss of an asset.

2. Write off the physical asset in question from your books. The net book value of the asset, which is the difference between the cost of the asset and the asset's accumulated depreciation at the time of loss, is posted to the insurance loss account. The balanced entry would be a debit to both the accumulated depreciation and insurance loss accounts, with a credit to the fixed-asset account.

3. Accumulate all of the net expenses incurred that relate to the loss of the asset. There may be a cost to remove what remains of an asset. For instance, if the asset in question is a vehicle and was rendered useless, it may cost to have it transferred to a junkyard. There could be needed repairs to other assets due to the loss of the asset in question. The presumption is that these repairs would not have been necessary unless the insured asset caused the damage needing repair. There also may be costs related to a cleanup effort due to the loss of the asset in question. When any amount of money is paid for these extraneous items, the debit is made to the insurance loss account, and cash is credited.

4. Document all the costs associated with the loss of the insured asset clearly and concisely. Take pictures if helpful. This information will be needed if there is ever a question about the validity of the insurance loss recorded in the income statement.

5. Deposit the insurance proceeds received from the insurance company. The entry will be a debit to your checking account (cash) and a credit to the insurance loss account. After all the accounting entries are made, the net amount in the insurance loss account is either your expense or income related to the loss of the insured property.

Tips & Warnings

• Before depositing your check from your insurance company, make sure you agree with the amount. Once the check is deposited, it is understood that you agree with the amount provided. This makes it very difficult to obtain more funds from the insurance company if the amount deposited was not correct.

References

• Principles of Accounting
• Accounting Coach: How Do You Record Money From an Insurance Claim Involving Property?