Journal entry for insurance claim received
Overview
In business, the company may buy the insurance for its important assets in order to mitigate the loss due to an accident, e.g. assets have been destroyed by fire, as it can receive the insurance claim from the insurance company to cover the loss value of the destroyed assets. Likewise, the company needs to make the journal entry for the insurance claim received in order to account for the claim received as well as to remove the destroyed assets from the balance sheet.
Of course, when there is an accident on the insured assets, the company may not receive the full amount to cover the loss value of the assets. This is not an uncommon occurrence as there may be some factors that may reduce the insurance claim that the company receives or the insurance itself does not cover 100% of the asset value. In this case, the company needs to also record the portion loss that is not covered by the insurance company as an expense on the income statement of the period.
The important assets that many companies have usually include fixed assets and inventory assets, such as commercial building, business equipment, business vehicle, and stock or inventory, etc. In this case, buying insurance for these assets is a way that they can mitigate the unexpected major loss that could end up destroying the business as a whole. For example, some companies may end up bankrupt if all of their inventory assets have been destroyed by the fire accident and they don’t have fire insurance to cover.
The company may also see the insurance as the way of converting the unexpected expenses into expected expenses as the company needs to pay the insurance company for its protection. This may help the company to make a better budget plan or forecast as it can avoid some unexpected expenses that are covered by the insurance company. In other words, it may help the company to better plan for its future growth.
Journal entry for insurance claim received
Insurance claim for fixed asset
When the company receives the insurance claim from the insurance company for the destroyed fixed asset that has been insured, the full cover of the fixed asset usually amounts to the net book value of the asset. In other words, the 100% of the insurance claim that covers the fixed asset is usually equal to the cost less accumulated depreciation of the fixed asset.
Likewise, if the company receives an insurance claim from the insurance company amounting to 100% of the loss value of the fixed asset, it can make the journal entry for insurance claim received by debiting the cash account and the accumulated depreciation account and crediting the fixed asset account.
100% recovered from insurance
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Accumulated depreciation | 000 | |
| Fixed asset | 000 |
In this journal entry, the credit of the fixed asset is to remove it from the balance sheet as it should already have been destroyed by the accident (e.g. fire) to have received the insurance claim from the insurance company. Likewise, the related accumulated depreciated also needs to be removed from the balance sheet too; hence the company needs to debit the accumulated depreciation account as in the journal entry above.
On the other hand, as mentioned, the recovered amount from the insurance may be less than 100% of the loss. In this case, the company needs to record the loss related to the unrecovered portion into the income statement to recognize it as an expense in the period.
Likewise, the company can make the journal entry for claim received for the recovered amount that is less than 100% of the total loss as below:
Less than 100% recovered from insurance
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loss due to accident | 000 | |
| Accumulated depreciation | 000 | |
| Fixed asset | 000 |
In this journal entry, the loss due to accident is an expense account that the company needs to recognize for the remaining loss value of the destroyed asset that is not covered by the insurance company. For example, if the company losses an asset that has the value of $50,000 due to a fire accident but the company only receives 80% of its value which is $40,000 from the insurance claim, it needs to record the remaining loss of 20% or $10,000 as an expense.
Insurance claim received example
For example, one of the company ABC’s buildings that has a net book value of $100,000 has been destroyed by the fire accident. However, the building has fire insurance which covers 100% of the building value. As a result, the company ABC which is the owner of the building receives $100,000 of cash as an insurance claim from the insurance company for the destroyed building.
The destroyed building has an original cost of $250,000 and an accumulated depreciation of $150,000 when it was destroyed by the fire accident.
In this case, the company ABC can make the journal entry for the insurance claimed received by recording the $100,000 into the cash account and the $150,000 into the accumulated depreciation account and crediting the original cost of $250,000 into the building account as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Accumulated depreciation | 150,000 | |
| Building | 250,000 |
After this journal entry, the destroyed building that has the original cost of $250,000 together with its accumulated depreciation of $150,000 that the company ABC has so far will be removed from the balance sheet. Additionally, as the company ABC receives the insurance claim that is equal to the 100% of the loss value of the destroyed building, there is no impact on the income statement.
Example 2:
For example, assuming that the company ABC above receives the insurance claim only 80% or $80,000 from the insurance company for the destroyed building that has the net book value of $100,000. Also, assuming that the destroyed building still has an original cost of $250,000 and its accumulated depreciation is $150,000 when it was destroyed by the fire accident.
In this case, the company ABC needs to record the uncovered loss of 20% or $20,000 as an expense in the journal entry for insurance claim received as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 80,000 | |
| Loss due to fire | 20,000 | |
| Accumulated depreciation | 150,000 | |
| Building | 250,000 |
In this journal entry, the loss due to fire of $20,000 is recorded as an expense on the income statement during the period. Likewise, this journal entry will increase the total expenses on the income statement by $20,000 and decrease the total assets on the balance sheet by the same amount of $20,000 (250,000 – 150,000 – 80,000).
Insurance claim for inventory asset
The journal entry for insurance claim received for the inventory asset is similar to that of the fixed asset as they are both need to be removed from the balance sheet once destroyed. However, as the inventory asset is a current asset, it does not have a related accumulated depreciation or amortization account like the fixed asset. Hence, there won’t be any accumulated depreciation included in the journal entry of this case.
Likewise, the company can make the journal entry for insurance claim received for the inventory asset by debiting the cash account for the amount received and crediting the same amount into the inventory account if the insurance claim received covers 100% of the value of the inventory loss.
100% recovered from insurance
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Inventory | 000 |
In this journal entry, there is zero impact on the total assets of the balance sheet as the removed inventory will be offset with the cash received from the insurance claim.
Similar to the above, if the insurance claim cannot cover 100% of the loss, the company needs to record the remaining amount that is not covered by the insurance as an expense. Hence, the company needs to make the journal entry for insurance claim received for the inventory asset in this case by recording the loss on the debit side of the journal entry as below:
Less than 100% recovered from insurance
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loss due to accident | 000 | |
| Inventory | 000 |
In this journal entry, the amount of loss is the uncovered amount which is the difference between the amount the company receives from the insurance claim and the amount of the inventory loss. Likewise, the total assets on the balance sheet will decrease by the uncovered amount while the total expenses on the income will increase by the same amount.
Example 3:
For example, there was a fire accident that burns all the inventory assets in the company ABC’s warehouse. However, the company ABC has fire insurance on its inventory assets which cover 80% of the $200,000 of the lost inventory. Hence, the company ABC receives a $160,000 insurance claim in cash from the insurance company after the fire incident.
In this case, the company can make the journal entry for the insurance claim received for the destroyed inventory as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 160,000 | |
| Loss due to fire | 40,000 | |
| Inventory | 200,000 |
In this journal entry, total assets on the balance sheet decrease by $40,000 (200,000 – 160,000) while total expenses on the income statement increase by the same amount of $40,000.