Don't pay more tax! Account for your insurance payouts correctly
Jennys server slipped off a rickety desk and broke. She realised itd cost her a small fortune to repair. She claimed from insurance and but made a mistake when she recorded her claim. If you make mistakes when you account for your insurance, you'll pay extra tax at year end like Jenny did! Read on to find out what the biggest insurance accounting mistake is, and avoid it happening to you...
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Don't account for your insurance payments as income
Many business owners think payments from insurance claims are income. This is wrong!
If you record the proceeds from an insurance claim as income, you'll overstate your income. This means you'll record you earned more profits and you'll pay more tax!
The transaction has everything to do with assets and nothing to do with income. Record it is as money you've received to compensate you for the expense to repair or replace your insured asset.
Once the claim was processed, the insurance company approved Jenny's claim and transferred R33 320 into her bank account.
This amount was the full claim amount (R43 320) less Jenny's excess (R10 000). She accounted for it incorrectly, because she didn't realise it wasn't income.
*These two entries are necessary to get the computer out of the books and the balancing entry is the only 'profit' you are showing, although it is only an accounting profit because it'll go right back into replacing the computer.
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So you see, it's easy to record insurance the right way. Keep in mind that insurance pays you for the expenses you'll have when you repair or replace the assets you claim for.
The Practical Accountancy Loose Leaf
shows you exactly how to record insurance in your accounting records and how to account for an insurance claim where your asset's totally written off.
Until next time
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