Jane Dotson
When it comes to bookkeeping, accurately recording insurance payments is crucial. Whether it's a claim for property damage, auto repairs, or health insurance, proper accounting ensures compliance with tax regulations and provides a clear financial picture. The process involves categorizing payments as income or expenses, utilizing accounts like Other Income or Repairs & Maintenance. For significant assets, depreciation must be considered, and insurance payouts may result in profits or losses depending on the asset's book value. Bookkeeping platforms like REI Hub and QuickBooks offer tools to manage these transactions, helping users navigate the complexities of insurance claims and financial reporting.
| Characteristics | Values |
|---|---|
| If the insurance claim is for a project | Add the project information to the "Received From" field |
| If the insurance claim is for a job | Attach the insurance claim to the "Other Income" account |
| If the insurance claim is for auto body damage | Choose the account that will be used to pay for the repairs |
| If the insurance claim is for an asset that has been fully depreciated | Remove the asset from service and the account books |
| If the insurance claim is for an asset that has not been fully depreciated | The check from the insurance company cannot count as profit; create a new account in your chart of accounts |
| If the insurance payout is more than the remaining value of the asset | You will have a profit; create a new revenue account called "Gain from Insurance Claim" |
| If the insurance payout is less than the remaining value of the asset | You will have a loss; create a new expense account called "Loss from Insurance Claim" |
| If the insurance claim is not related to a fixed asset | Record the repair expenses as you normally would, and credit the repair expense account |
| If the insurance claim is for a fixed asset | It is acceptable to put the money received into an expense account |
| If the insurance claim is for personal insurance proceeds | The journal entry in the business bookkeeping records will be: Debit: Cash/Bank (asset account), Credit: Capital (equity account) |
| If you need to draw money out of the business for personal use | The journal entry will be: Debit: Drawings (asset account), Credit: Cash/Bank (asset account) |
| If the insurance claim is for prepaid insurance | The amount of the insurance premiums that remain prepaid at the end of each accounting period are reported in the current asset account, Prepaid Insurance |
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What You'll Learn
Recording insurance payouts for claims unrelated to fixed assets
For example, let's say that water came through a vent in the roof of your rental property during a storm, causing $15,000 of damage to the insulation in the attic, drywall, carpet, and carpet pad. Your insurance company sends you a check for $10,000, and you start working on the repairs. In this case, you would record the repair expenses as usual, and then credit the repair expense account once you deposit the insurance check.
If you are using REI Hub, you can use the 'Refund Received' transaction type. When you run your P&L reports, the total shown for your repairs account will be the net total of all the repair expenses and the insurance payment.
It's important to note that insurance proceeds are not considered income. They are used to offset the loss incurred, net of an insurance deductible. Therefore, it is acceptable to put money received into an expense account to reduce the original expense. For example, if you originally put the repairs against a 'Repairs & Maintenance' expense account, that is the account you will put the insurance proceeds against.
Additionally, if you are dealing with a large gain from insurance proceeds, it is recommended to record it in a separate account to clearly label the gain as non-operational. For example, you can create an account called "Gain from Insurance Claims" to record these gains separately.
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Removing assets from service and account books
When an asset is no longer in use, it must be removed from the balance sheet. This often results in a gain or loss that must be recognised on the income statement.
To remove an asset from service and the account books, you must reverse both the recorded cost of the fixed asset and the corresponding amount of accumulated depreciation. The difference between the two is then recognised as either a gain or a loss. When there are no proceeds from the sale of a fixed asset and the asset is fully depreciated, debit all accumulated depreciation and credit the fixed asset. When disposing of a fixed asset, the fixed assets account must be credited for the original cost of the asset, and the total accumulated depreciation must be removed from the account with a debit entry.
In the case of insurance payouts, it is important to note that insurance proceeds are not income. If the insurance company paid more than the remaining value of the asset, you will have made a profit. If you received less than the book value, you will have made a loss. When recording these transactions, you can put the insurance check back into the same expense account that the original repairs were coded to, which will offset that expense. For example, if you originally put the repairs against a "Repairs & Maintenance" expense account, this is the account you will put the insurance proceeds against.
- Navigate to the Fixed Asset section of your REI Hub account.
- Select the unit from your list of assets, then click "Add Transaction".
- Choose the "Manual Journal" option.
- Add the transaction date and a brief description in the appropriate fields.
- Debit the remaining book value to the Asset Disposal account.
- Credit the remaining book value to the original asset account.
- Once you've deposited the insurance check, record it as a refund.
- Click "Add Transaction", then select "Refund Received".
- Choose "Asset Disposal" as the expense account, and in the "Payment Account Refunded" field, select the account where you deposited the check.
- The balance in your Asset Disposal account is your profit or loss.
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Recording insurance payouts as taxable income
Money received from an insurance claim is typically not taxed, as the IRS only levies taxes on income, which is money or payment that results in an increase in wealth. The purpose of insurance is to "make you whole" by providing enough payment to bring you back to your state before an incident occurred. For example, if your car is damaged in an accident and you receive a payout from your insurer to repair it, the money is not taxable as long as it is used to restore the car to its previous state.
However, there are certain situations where insurance payouts may be considered taxable income. If you receive a settlement or claim payout that benefits you beyond your previous financial situation, it may be taxable. For instance, if the insurance company overpays you or if you perform the repairs yourself and pay yourself, any remaining funds after your property has been repaired or replaced may be taxed. Additionally, if you have previously deducted medical expenses or reported lost income, any reimbursement from an insurance claim must be included as income.
Short- and long-term disability insurance proceeds, which provide income if you are unable to work, are taxed as regular income. If your insurance claim has resulted in a lawsuit, the tax situation can become more complicated. While compensation for medical bills and property repairs is generally not taxed, punitive damages awarded by a judge may be subject to tax.
When recording insurance payouts in your bookkeeping, it is important to consult with a tax professional or accountant due to the complexities involved. In some cases, insurance payouts can be recorded as refunds or credited to the repair expense account to offset the original expense. This approach avoids distorting the financial results by showing a significant loss in one month followed by a large profit when the insurance money is received.
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Using expense accounts to offset original expenses
When dealing with insurance payouts, it is important to consider the type of insurance and the nature of the claim. For example, personal insurance proceeds, such as life insurance, are treated differently from business insurance claims. In the case of personal insurance proceeds deposited into a business bank account, the journal entry would be:
Debit: Cash/Bank (asset account)
Credit: Capital (equity account)
If you need to withdraw the money from the business for personal use, the journal entry would then be:
Debit: Drawings (asset account)
Credit: Cash/Bank (asset account)
When it comes to business insurance claims, the insurance provider will typically pay money to cover the costs of repairing or replacing damaged assets or properties. These payments are called proceeds. In this case, the journal entry would be:
Debit: Cash/Bank (asset account)
Credit: Other Income (income account)
However, it is important to note that simply crediting the insurance payout as income may not provide an accurate picture of the financial situation. Instead, it is often advisable to use an expense account to offset the original expenses incurred due to the damage. This can be done by crediting the repair expense account or the specific expense account related to the damage, such as "truck repair and maintenance."
For example, if the insurance payout is for a claim related to a fixed asset, such as an HVAC unit, you would need to consider the depreciation of the asset. If the asset has not been fully depreciated, the insurance payout cannot be counted as profit. In this case, you would remove the asset from service and create a new account in your chart of accounts, such as "Asset Disposal." You would then credit the Gain from Insurance Claim account and debit the Asset Disposal account to zero out the Asset Disposal account and move the profit or loss to the proper account.
By using expense accounts to offset original expenses, you can provide a more accurate representation of the financial impact of the insurance claim and avoid showing a large loss followed by a large profit in consecutive months. This approach ensures that your client has a clearer understanding of their financial position and results from operations.
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$29.83
Journal entries for prepaid insurance
Prepaid insurance is the amount of insurance premium that a company pays in one financial year, availing of its benefit in another financial year, usually the upcoming financial year. Prepaid insurance is treated as an asset of the firm and is recorded under the Asset side of the balance sheet. Prepaid insurance is logged as an asset on the balance sheet and turns into an expense over time. When prepaid insurance is paid, it is recorded as a debit in the Prepaid Expense account (an asset account) and a credit in the account used to pay, such as Cash or Checking.
As the insurance coverage period goes on, the prepaid insurance is expensed. This involves debiting the insurance expense account and crediting the prepaid insurance account. Each month, the prepaid insurance is adjusted to show the insurance expense. This is repeated monthly until the prepaid insurance is fully expensed. For example, if you prepay $12,000 for a year's insurance, you record $12,000 as a prepaid expense (asset). As you use the prepaid expense, it gets expensed on the income statement. Using the insurance example, if you recognize the expense monthly, you expense $1,000 each month.
Prepaid insurance can be recorded in the books in a few different ways. One way is to use an expense account, which will show a large loss in the month of the damage and a large profit in the month the insurance check is received. Another way is to use an account on the balance sheet for both entries, which will provide a clearer picture of the client's day-to-day results.
When recording an insurance payment for a claim, the name of the insurance company can be chosen from the "received from" field. The account that will be used to pay for the repairs can be selected, such as "truck repair and maintenance". A description, such as "proceeds from accident claim", can also be included. It is important to note that insurance proceeds are not considered income.
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Frequently asked questions
Use an account on the balance sheet for both entries, instead of using an expense account.
Add the project information to the "Received From" field. This will allow the income to appear on the project profitability report and on the P&L as income.
For "Received from", choose the name of your insurance company. For "Account", choose the account you will use to pay for the repairs. For "Description", write "proceeds from accident claim".
Record the repair expenses as you normally would. Once you deposit the insurance check, credit the repair expense account instead of an income account.
If the insurance provider paid more than the remaining value of the asset, you will have a profit. If they paid less than the book value, you will have a loss. If you have a profit, create a new revenue account called "Gain from Insurance Claim". If you have a loss, create a new expense account called "Loss from Insurance Claim".
