Insurance is required for all transactions. Companies recovering from losses such as fire, theft and unexpected natural disasters. It accounts or accounts that owners get it wrong.

On successful claims, the payment is usually made to the insured. My experience has led me to believe that small businesses have no idea how, to account for the settlement of insurance. Most companies reflect the payment of income.

Not only would this be misleading but also violates international accounting standards. Since the transaction has everything to do with property and nothing to do with income, it should change against assets. Erroneous accounting for assets could hurt the company even further in the future, if similar insurance claims are made.

Insurance companies settle claims on assets at book value and not cost. (And yet the property was insured at the expense at the acquisition date). This principle could be different from one country to another, the book value is generally accepted as the norm. Since most small businesses fail to keep proper records of fixed assets, insurance companies perform a “desk top valuation”, or to “plan”, the carrying amount largely lower than the “real” book value. Without appropriate data, the claimant can not debunk the final conclusions of the assessors.

Before I lose you in a sea of ​​confusion, let me elaborate. If the property is in your books at least, no asset register, but you have no date of purchase, and this property is lost due to theft, not accurate dissolution can be created. Furthermore, if the claim is settled, and reflects the “income”, what happens to the property that was stolen, but still considers your books?

Many people reading this article could not care a hoot about the number crunching involved, but please stay with me for a minute. You may not care, but the investor, bank and yes, the insurance company could take the financial statements when they require reports.

The method to account for the damage “method of disposal.” Every property subject to an insurance claim should be transferred to the “Disposal Account”. Depreciation of property for that period is calculated and credited disposal account with the insurance settlement. Cost less depreciation equals book value. Any settlement amounts above or below book value, will result in a loss or profit on disposal.

An insurance claim, wrongly recognized as “income” can be adjusted by transferring the amount to the disposal account. After successful these records, disposal account should balance to zero. New items you would show, or loss of profits claim (statement), the settlement bank account, fixed assets less the stolen / lost property and lower amortization schedule for the year.

I admit that this is a job your accountant, you are, however, required to provide detailed reports. But how many companies continue to pay, the same insurance premiums in the property, date of purchase, when, just at a lower premium, due to the lower value of assets. (Before any asset loss).

Also precarious property situation in them, could lead to problems in the tax affairs.

No company can afford a visit from the IRS. Did you know that the tax authorities always start auditing, assets, before they go on income?