Phone Claim - Accounting For insurance Claim Settlements
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Insurance is a necessity in any business. Businesses cover themselves against losses such as fire, theft and unexpected natural disasters. It is with the bookkeeping or accounting that owners get it wrong.
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On prosperous insurance claims, a cost is usually made to the insured. My sense has led me to believe that small businesses have no clue, as to how, to inventory for insurance settlements. Most businesses reflect the cost as income.
Not only would this be deceptive but also violates International Accounting Standards. Since the transaction has all to do with assets and nothing to do with income, it should be adjusted against assets. Erroneous accounting for assets might prejudice the enterprise additional in future, if similar insurance claims are made.
Insurance companies decide claims on assets, on its book value and not its costs. (And yet the asset was insured on its cost at date of purchase). Whereas this principle might vary from country to country, book value is widely accepted as the norm. Since most small businesses fail to pronounce permissible fixed assets registers, insurance companies accomplish "desk top valuations", or make an "estimate", on the book value, mostly much lower than its "real" book value. Without permissible records, the claimant cannot debunk the assessor's final conclusions.
Before I loose you in a sea of confusion, let me elaborate. If an asset is on your books at least, without the asset register, but you have no purchase date, and this asset is lost due to theft, no spoton wear and tear can be furnished. Furthermore, if a claim is settled, and reflects as "income", what happens to the asset that was stolen, but still reflects on your books?
Many reading this report could not care a hoot about the whole crunching involved, but please stay with me for a minute. You might not care, but an investor, a bank and yes, the insurance enterprise might pick this up on your financial statements when they demand your reports.
The method used to inventory for insurance claims is the "disposal method". Any asset subject to an insurance claim should be transferred to a "Disposal Account". Depreciation on the asset for the relevant duration is calculated, and credited to the disposal inventory with the insurance settlement. The cost, less depreciation equals book value. Any community amounts over or under book value, will supervene in a loss or behalf on disposal.
An insurance claim, wrongly entered as "income", can be adjusted by transferring the whole to the disposal account. After effecting these entries, the disposal inventory should equilibrium to zero. Your new records would reveal, the loss or behalf on claim (income statement), community in bank account, fixed assets less the stolen/lost asset, and a lower depreciation estimate for the year.
I reply that this is your accountant's job, you any way have a duty to supply spoton records. But how many businesses continue to pay, the same insurance premiums on the assets, since purchase date, when they, entitled to a lower premium, due to a lower asset value.(prior to any asset losses).
Also, a precarious asset situation in your books, might lead to problems in your tax affairs.
No enterprise can afford a visit from the Irs. Did you know that tax authorities always start auditing, your assets, before they move on to your income?
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