Expert: Arthur Naman - 6/10/2009

Question
Book keeping question:  I have inventory that cost $20,000.  Due to a flood, I lost $16,000 worth.  The insurance company did pay $4,000.  I am now not sure how to jounalize this whole situation.  Any help would be appreciated.  Thanks.

Answer
Setup an account called "inventory loss account" or something like that. Then credit your inventory account for the $16,000 loss. Debit the loss account.

The receipt of a check as reimbursement for the loss is a debit to cash and a credit to the loss account. There will be a net $12,000 loss or expense in that account.

Keep in mind that typically when a tax return is prepared, the inventory at the end of the year is lower of cost or market. So, please discuss this with whoever will be preparing your annual tax return.