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:
- Write off the damaged inventory to the impairment of inventory account.
- When the claim is agreed, set up an accounts receivable due from the insurance company.
- 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
|Impairment of inventory (expense)||XXX|
|Insurance compensation (income)||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.