Insurance - How to recognize a payment on a claim?

One of the risks of having a business, is a chance for a business to have to file a claim with their insurance carrier.

Let’s discuss a couple of scenarios.

Scenario 1:

If you owned a retail store, and one night you received a call from your local Sherif’s department to let you know that your store is engulfed in flames. In your store, you have $500,000 in inventory. Now, as a business owner, more than likely you will have enough total insurable value (TIV) insurance in place to cover your inventory and equipment. You ask how do I recognize this event on the financial statements?

First, you must file the claim with your insurance company, and you expect $500,000 (if no deductible) from the insurance company. As a business, you have to record this event.

Your entry would be as follows:

Debit - Insurance Asset: $500,000

Credit - Inventory: $500,000

After 30 days, you received a nice check from your insurance carrier. How would you record that entry?

Credit - Insurance Asset: $500,000

Debit - Bank Cash Account: $500,000

Scenario 2:

Now, what happens if the agreed amount to the claim is different? Let’s say that new amount is $450,000, instead of $500,000. How would you record that?

Debit - Insurance Asset: $450,000

Debit - Loss of Inventory: $10,000

Credit - Inventory: $500,000

After 30 days, you received a not so nice check from your insurance carrier. How would you record that entry?

Credit - Insurance Asset: $450,000

Debit - Bank Cash Account: $450,000

Isn’t accounting fun? We think so! Next week, we will be looking on how to record a claim with their insurance carrier that involves an asset that is impacted by accumulated depreciation.