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
| Account | Debit | Credit |
|---|---|---|
| Impairment of inventory (expense) | XXX | |
| Inventory | XXX |
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | XXX | |
| Insurance compensation (income) | XXX |
| 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.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.