When your business suffers from theft, flood or fire, you lose money. When the insurance company pays out for your claim, you get the money—or at least some of it—back. In accounting, insurance recovery money is a separate entry from other income. Usually you report it as a gain in the same category you reported the original loss.
Don't assume that you're going to get money back from your insurer. Insurance recovery money should only be entered on the books when you've received the money or you have solid assurance that your insurer will cut you the check. It's also important to consider how soon you can expect the money. You treat an insurance payout received in the same year that you recorded the loss differently from recovery money received the following or later years.
If the loss you suffered relates to a capital asset, standard accounting practice is to treat it as an operating expense. If you recover part or all of the loss through insurance in the same year, you should add it in with the loss to get your net expense. If you receive the money the following year, record it independently of the loss as operating income. If you spend the money to replace the lost or damaged asset, you still need to record the loss or gain, and treat the replacement as a separate transaction.
If your loss came from theft or embezzlement, rather than damage to an asset, you treat it differently. The loss goes down in your books as a nonoperating expense; if you recover the money the same year as the loss, you combine the two figures and report the net expense. If the recovery comes in a later year, report it as nonoperating income. You need to disclose the loss and recovery in your financial statements, but you can do it in any manner that conforms to accounting practice.
When you receive money in return for a damaged or destroyed asset, the asset is described as undergoing involuntary conversion. Your gains or losses on the conversion are counted as part of your business's taxable income and deductible expenses. If you replace the damaged property, you may not have to worry about taxes immediately. Instead, you deal with the taxes when you transfer title to the asset in a taxable sale or exchange.
- University of Texas: Policy For Accounting and Financial Reporting for Impiarment of Capital Assets ...
- American Institute of CPAS: "Accounting and Disclosures Guidance for Losses From Natural Disasters"