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Insurance claim on a destroyed asset? Here's how to account for its disposal

by , 23 September 2013
When you enter into an insurance contract, the accounting treatment of insurance costs is the same as when you account for any other costs in your business. But insurance has a few details you need to know about. Read on to discover how to account for an insurance claim where the asset is totally destroyed under the disposal method of accounting.

Many business owners get accounting issues relating to insurance wrong, especially when it comes to accounting for an asset that's destroyed under the disposal method.

If you're one of these business owners, the Practical Accountancy Loose Leaf has got you covered.

Has your asset been destroyed under the disposal method of accounting? Use these four steps to account for an insurance claim

Step #1: Initially remove the asset from your accounting records by clearing the fixed asset account.

Step #2: Write off all accumulated depreciation to the fixed asset disposal account.

Step #3: Record the proceeds from the insurer into the asset disposal account.

Step #4: Reconcile your fixed asset disposal account.

To ensure you get the treatment of insurance right, the Practical Accountancy Loose Leaf recommends you remember these three things about insurance.

Here's a checklist of the three things you must remember about insurance:

#1: Insurance contracts are normally prepaid accounts. This means you'd typically pay your premiums for future periods, normally 12 months long. Ensure you spread the insurance costs over the cover period appropriately.

Don't fall into the trap of writing up the full expenses in a single period as you could be incorrectly overstating you expenditure in certain periods.

#2: On renewal dates, be careful of adjustment calculations and always keep a record of your adjusting calculations.

Your auditors need to gather evidence to substantiate values in your accounting systems. You'll save time and effort by just having a proper filing system of your calculations.

#3: When you make claims, ensure you keep all your supporting documents. Keep filing your accounting records properly because one mistake could cost you thousands of rand. Or land your directors and prescribed officers in jail for up to ten years.

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