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