How to Account for Insurance Proceeds
How to account for insurance proceeds seems to be a more common question these days. Here is how to get it right. We’ll cover the various scenarios separately.
If you are the technical type and want to dig deeper, all of this is covered under ASC 605-40 and ASC 610-30 if you have already adopted ASC 606.
If you have received insurance proceeds related to the damage or destruction of leased assets, click here for a full review on how to handle that.
Repair Only
This is the easy one. If an asset was damaged and you received insurance proceeds to repair the asset, simply expense the repair and recognize the insurance proceeds as an offset to the expenses incurred.
Record the repair expense when the repair is made. Record the insurance proceeds when they are received. You can record a receivable for the insurance proceeds only once the amount is fixed and determinable by final acceptance and approval from the insurance company.
Assets Replaced
If an asset must be replaced, the asset should be removed from your books with its corresponding accumulated depreciation. A loss is recorded for any adjusted basis remaining on the books. Don’t worry. This loss will be offset by a gain when you record the insurance proceeds.
The insurance proceeds are recorded as a gain. Like the repair scenario, insurance proceeds can only be booked once the amount is fixed and determinable by final acceptance and approval from the insurance company. Let’s look at example for clarification.
Example
A storm came through town and lightning struck your building, destroying your phone system. Your phone system is toast. You’ll have to buy a new one. Below are the estimated figures related to the damage and replacement.
| Item | Amount |
| Original Cost (Cost Basis) of Old Phone System | $50,000 |
| Accumulated Depreciation on Old Phone System | $30,000 |
| Cost of New Phone System | $55,000 |
| Insurance Proceeds | $50,000 |
Assuming the insurance proceeds were received before year-end, the following journal entries would be recorded.
| Item | Debit | Credit |
| Remove destroyed phone system from your books and record the loss | ||
| Equipment – Accumulated Depreciation | $30,000 | |
| Gain/Loss on Equipment | $20,000 | |
| Equipment – Cost | $50,000 | |
| Record Insurance Proceeds Received | ||
| Cash | $50,000 | |
| Gain/Loss on Equipment | $50,000 |
Since the insurance proceeds were received in the same year as the loss, there is a net gain of $30,000 that will show up on the income statement. If the insurance proceeds were not received or “fixed and determinable” in the same year, the income statement would show a loss of $20,000 in the year of loss and a gain of $50,000 the year the insurance proceeds were received or “fixed and determinable.”
When the insurance proceeds become fixed and determinable, you record the following journal entry to record the gain. Instead of debiting Cash as we did in the previous scenario, we debit Accounts Receivable. When the insurance proceeds arrive, debit Cash and credit Accounts Receivable.
| Item | Debit | Credit |
| Record the gain once proceeds are fixed and determinable | ||
| Accounts Receivable | $50,000 | |
| Gain/Loss on Equipment | $50,000 | |
| Record Insurance Proceeds Received | ||
| Cash | $50,000 | |
| Accounts Receivable | $50,000 |
To record the purchase of the new phone system, use the following journal entry.
| Item | Debit | Credit |
| Record the purchase of the new phone system | ||
| Equipment – Cost | $55,000 | |
| Cash | $55,000 |
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