Journal entry for goods lost by fire

Introduction

When there is a fire incident resulting in the loss of our inventory goods, we will need to recognize and record the loss as an expense at the period that it occurs, especially when the loss is not or cannot be covered by insurance. In this case, we need to make the journal entry for goods lost by fire by recording the lost amount as an expense on the income statement.

Of course, if the loss of goods caused by the fire has insurance protection, the loss will be covered, partly or fully, by the insurance company. Hence, we can net off the loss with the cash received from the insurance claim.

In either case, we still need to remove the destroyed inventory goods from the balance sheet of our account. Hence, the balance of the inventory goods on the balance sheet will be reduced by the amount of loss due to fire regardless of having insurance covered or not.

Journal entry for goods lost by fire

Goods lost by fire without insurance covered

We can make the journal entry for the goods lost by fire without insurance covered by debiting the loss due to fire account and crediting the inventory account for the lost amount.

In this journal entry, loss due to fire account is an expense account in which we need to recognize and record the loss to the income statement in the period that it occurs. Likewise, this journal entry will increase the total expenses on the income statement while decreasing the total assets on the balance sheet due to the goods lost by fire.

Example for goods lost by fire

For example, on November 24, there was a fire incident in one of our warehouses resulting in a $10,000 loss of inventory goods by the fire. Due to it being a new warehouse that we have just set up for storing some of the inventory goods, we have not purchased the insurance to cover it yet.

In this case, we need to make the journal entry for the $10,000 goods lost by fire by recognizing the amount lost as an expense on the income statement as below:

This journal entry of goods lost by fire on November 24, will increase total expenses by $10,000 while decreasing total assets by the same amount.

Goods lost by fire with insurance covered

As mentioned, if there is insurance covered on the goods lost, we can net off the loss with the cash received from the insurance claim. In this case, we will only charge the remaining amount of the loss that is not covered by the insurance to the income statement.

Likewise, we can make the journal entry for goods lost by fire with some amount covered by the insurance as below:

Partly covered by insurance:

In this journal entry, the loss due to fire is the amount that is not covered by the insurance and will be charged to the income statement as an expense in the period.

On the other hand, if there is full insurance covered, we can net off the total amount of loss due to fire with the cash received from the insurance claim.

In this case, the journal entry for goods lost by fire with the full insurance will be the debit of the cash account and the credit of the inventory account.

Fully covered by insurance:

In this journal entry, there is no expense that is charged to the income statement as we have the full insurance cover for the goods lost by fire.

Example 2:

For example, assuming that we have an 80% insurance cover for the $10,000 inventory goods that are lost due to fire in the example above. As a result, we receive the 80% insurance claim of the loss amount from the insurance company which is $8,000 in cash.

In this case, we can make the journal entry for the $10,000 goods lost by fire with the 80% insurance claimed received as below:

In this journal entry, we only charge $2,000 as an expense to the income statement. This is due to we receive the cash of $8,000 from the insurance company to cover 80% of our loss of goods.