Accounting For Insurance – When inventory is destroyed in a fire, the business makes an insurance claim for the cost of replacing the damaged inventory. The journal entries below are a quick reference for calculating insurance payments.
In each case, the insurance revenue journal entries show a debit and credit account with a summary statement. See the examples section for a full explanation of log entries.
Accounting For Insurance
If the insurance company does not fully cover the damaged stock, there will be a difference between the debit of the impairment account in the first journal and the credit of the insurance compensation account in the second journal. This net debit represents the loss to the business due to inventory damage, but not included in the insurance claim.
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Chartered Accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for over 25 years and has built financial models for all types of industries. He was the chief financial officer or manager of small and medium-sized companies and managed his own small business. He was a manager and auditor at Big 4 accountancy firm Deloitte and graduated from Loughborough University. In Part 1 of our continuing education series, we sit down and talk with Schuyler Ryan CPA, AIAF – Assistant Vice President of Finance at Union Mutual.
Mark Meyer: Hi Schuyler, thanks for the quick call to talk insurance and accounting. Are you ready to do it?
SR: One of the challenges we face in accounting is being stuck in the past, which prevents us from looking to the future. To some extent, this will never change because we cannot report funding in the period before the end of the period. Our role as accountants is often in the rearview mirror.
For example, when the calendar year changes, accounting does not turn the calendar until the end of the first quarter. For the insurance industry, this is largely due to the March 1st annual return filing period and the extended application period of June 1st associated with the previous year.
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MM: Is it an accounting issue that you feel “stuck in the past” or is it a process issue?
SR: I would say it’s a mix. Part of the bill is the nature of our role. You can’t report until the period closes, for example, you can’t report the 12/31 financials until 1/1, because you have to close all of that activity. But there is also a process part to it.
SR: There is an opportunity to streamline our processes to more efficiently close the financial period and complete the necessary reports. If we could complete the closing process sooner, we would be able to move on to the next stage sooner. If we could get to the next stage sooner and have access to real-time information, we would be a better business partner for the rest of the Company.
Working day after the end of the month. This has been an improvement for us – a few years ago it was a real struggle. However, we continue to work more efficiently in our closing and financial reporting processes.
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One example that has helped us realize process efficiencies is in the area of invoice processing and end-of-period invoicing. Once invoices are entered into the system, they are automatically credited to financial accounts without manual entry.
MM: This is a big reason for my next question. Can it be said that your job is getting easier due to the proliferation of new tools and technologies?
SR: I would say that new tools and technologies are making even the most basic accounting tasks easier and more efficient. Overall, as mentioned earlier, we have seen many improvements, especially in key areas such as journal entry creation and invoice entry/processing.
An automated workflow for processing invoices and approvals saves time and also allows you to copy and paste journal entries. However, there are still complex accounting processes that require the skills of an accountant. Simplifying some basic tasks has helped free up team members to take on more complex tasks that help them grow and develop professionally.
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Automation. You don’t want to automate a process with so many nuances that you spend more time fixing the automation (which is wrong) than doing it manually. The goal is to automate things effectively.
We can’t automate everything, and I think it depends on all these nuances, but if you can get it to a good place where it works effectively, I don’t think there can be too much automation.
MM: You talked earlier about your employees and how you want them to use their critical thinking and problem-solving skills. Do you think they will accept this idea?
SR: I’m proud of how our accounting department has embraced this growth mindset. I’m a visionary, innovator, and “How can I optimize this process?” How can we help the company be the best it can be?”
Insurance Accounting Spreadsheet
That’s changed over the last few years and goes back to that earlier interview with Spencer Kuo about automating accounting where you talked about the “accountant mentality.” That mentality is gone. Accountants are no longer just “bean counters”. We have to be really analytical and help a large organization make strategic decisions.
It’s important to shift from someone who wants to do accounting to someone who needs to be a problem solver. Having a finance team comprised of critical thinkers and individuals who can embrace change and innovation is essential.
MM: Do you think we are at a crossroads in the role of the accountant? When interviewing new job candidates, do they know what you’re looking for? Do they understand that accounting expectations have changed?
SR: That’s a good question. I think we are at a crossroads and we need to make this change. When it comes to interviewing candidates, I look for someone who is a critical thinker, a problem solver, and not content to do the same thing every day.
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When you conduct these interviews and meet with candidates, you often ask people, “What brought you to accounting?” You can get an answer to the question. Do they want to manage debits and credits or think about problems and solve them? There is a definite difference.
MM: That’s an interesting question because I don’t know what the normal answer would be. But I guess it’s safe to say that everyone gets into it for different reasons.
SR: My way of thinking when I started in accounting was, “I like the concept of balancing everything,” and that makes sense/makes sense to me because accounting is so black and white. But now that I feel like I’m doing something different every day, I’m looking forward and thinking seriously about how different decisions will affect my finances. So my perspective changed for me throughout my career because I realized it’s not black and white.
SR: Mastery is a good method. People just have to be smart. This task cannot be accomplished by following step-by-step instructions. I’m looking for people who I know are smart and can think critically about the task at hand. I like having team members with different skills and backgrounds because they can challenge and encourage each other by offering different perspectives.
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SR: Yes, maybe. It’s not as easy as you think. A lot of times people see a job opening for an accountant and they think it’s an accountant, but that’s not what I’m looking for. There are more mainstream roles that would suit someone who fits this role, so I don’t want to disparage him. The same thing, for our team – in insurance corporate accounting, for example, I’m looking for someone with a different skill set – analytical and progressive.
MM: It’s almost time to graduate. That said, it was awesome. So what’s happening in the industry in five to ten years? Are we ready for a tech tsunami where AI and automation will upend the industry?
MM: Then let’s turn it into a two-pronged question. First let’s talk about accounting and then how accounting affects insurance.
SR: I understand. When it comes to AI and automation, I think both will continue to shape the accounting field, and again, it will determine the type of person you need.