Accounting for Insurance Proceeds

When inventory is destroyed by fire, a business makes an insurance claim for the replacement cost of the damaged inventory. The journal entries below act as a quick reference for accounting for insurance proceeds.

The process is split into three stages as follows:

  1. Write off the damaged inventory to the impairment of inventory account.
  2. When the claim is agreed, set up an accounts receivable due from the insurance company.
  3. Receive the cash from the insurance company.

In each case the accounting for insurance proceeds journal entries show the debit and credit account together with a brief narrative. For a fuller explanation of journal entries, view our examples section.

Accounting for Insurance Proceeds Journal Entries

The damaged inventory is written off
Account Debit Credit
Impairment of inventory (expense) XXX
Inventory XXX

 


The claim is agreed with the insurance company.
Account Debit Credit
Accounts receivable XXX
Insurance compensation (income) XXX

The cash is received from the insurance company
Account Debit Credit
Cash XXX
Accounts receivable XXX

If the insurance company does not fully compensate for the damaged inventory, there will be a difference between the debit on the impairment of inventory account in journal one, and the credit on the insurance compensation account in journal two. This net debit represents a loss to the business for inventory damaged but not covered by the insurance claim.

Accounting for Insurance Proceeds August 8th, 2017Team

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