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.