For the smooth running of any business, it must have the required amount of goods. These goods may or may not be insured by the firm against any risk of loss. Loss can occur due to fire in the godown, any theft might take place or these goods may be lost in an accident. In case these goods have been insured by the firm against any risk of such loss, then on an investigation, it might receive some or a full amount of compensation from the insurance company in respect of the loss that has been incurred. This procedure usually takes a few days to recover the amount of loss from the insurance company and hence the insurance company is shown as an asset in the Balance sheet. And the other situation can be when these are not insured against any risk of loss. Then, in such a case the amount of goods lost due to accident, fire or theft shall be written as a loss in Profit and Loss A/C against which no claim shall be received.
Case 1. Insurance Company doesn’t accept the claim:
Journal Entry:
A. If Loss due to Accident/Fire/Theft is given outside the trial balance:
In such case, two effects would take place which are-
- Loss due to Accident /Fire /Theft will be written in the Cr. side of the Trading A/c. with the total amount of loss that has occurred.
- This loss will be written in Dr. side of Profit & Loss A/c. with the actual amount of loss incurred.
B. If Loss by Accident/Fire/Theft is given inside the trial balance:
In such a situation, it will be shown only in the Dr. side of the Profit & Loss A/c.
Journal Entry:
Illustration:
Goods lost by fire amount to ₹ 29,000 and the insurance company doesn’t accept the claim. Pass the necessary entries.
Solution:
Note:
- Goods lost by fire have been shown on the credit side assuming there is no purchase in the current year, alternatively, it can also be reduced from purchases.
- Nothing would appear in the balance sheet as no claim has been given by the Insurance company.
- Trading and Profit and Loss A/c has been prepared considering that it has been given outside the trial balance. In case when they are given inside the trial balance, Goods lost by Fire would be shown only in the debit side of Profit and Loss A/c.
Case 2. Insurance company partially accepts the claim:
Journal Entry:
A. If Loss by Accident/Fire/Theft is given outside the trial balance: In such case, three effects will take place:
- First, Loss by Accident/Fire/Theft will be written in the Cr. side of the Trading A/c with the total amount of loss that has occurred.
- Second, it Will be written in Dr. side of Profit & Loss A/c, with the actual amount of loss incurred.
- Third, it will be shown in the Assets side of the Balance Sheet, with the amount of claim that has been accepted by the insurance company.
B. If Loss by Accident/Fire/Theft is given inside the trial balance:
In such a situation, it will be written only on the Dr. side of the Profit & Loss A/c.
Illustration:
Goods lost by fire amounting to ₹45000, which were insured and the insurance company admitted the claim for ₹15,000 only.
Solution:
Note: Here, it is assumed that goods lost by fire amounting to ₹45,000 has been given outside the trial balance.
Note:
- Trading, Profit and Loss A/c, and balance sheet have been prepared considering the goods are given outside the trial balance.
- In case they are given inside the trial balance, then the entire loss would be debited to Profit and Loss A/C.
Case 3. Insurance Company fully accepts the claim:
Journal Entry:
A. If Loss by Accident/Fire/Theft is given outside the trial balance: In such case, two effects will take place:
- First, Loss by Accident/Fire/Theft will be written in the Cr. side of the Trading A/C with the total amount of loss that has occurred.
- Second, it will be shown in Assets side of the Balance Sheet as Insurance claim by the amount of loss that has been accepted by the insurance company.
B. If Loss by Accident/Fire/Theft is given inside the trial balance:
In such a situation, it is assumed that payment from Insurance Co. has not been received yet, so it will be only shown in the Assets side of the Balance Sheet.
Illustration:
Goods lost by fire amounting to ₹45,000 were insured and the insurance company admitted the full claim.
Solution:
Note: Here, it is assumed that goods lost by fire amounting to ₹45,000 has been given in the trial balance.