How to record compensation received from an insurance company for an incident involving a vehicle, equipment, or any asset: where the account belongs in the chart of accounts, the journal entry for each scenario, and the VAT treatment.
When receiving compensation from an insurance company for an incident (vehicle, equipment, or any asset), it is recorded in the system via a manual journal entry depending on the situation.
Path in Qoyod
Accounting › Chart of Accounts › Revenue › Other Revenue › Add a new account with the “+” option next to the account
Adding the account to the chart of accounts
Create a sub-account under Other Income with the name “Insurance Compensations” (or “Insurance Compensations, Vehicles” if you want more detail). See Adding Accounts to the Chart of Accounts: Three Methods, Quick Add, Import.
- Insurance compensation is classified under Other Income, not Operating Income, because it is not a result of the entity’s core business activity.
Accounting entries by scenario
Each scenario is recorded as a manual journal entry. See How to Add Journal Entries Using Manual or Simple Entry Methods.
Scenario 1: receiving cash compensation directly
- From Bank or Cash Account (Debit)
- To Insurance Compensations Account (Credit)
Scenario 2: compensation reduces a previously recorded repair expense
This is only used if there is an actual repair expense recorded for the same incident and the compensation does not exceed the expense amount.
- From Bank or Cash Account (Debit)
- To Vehicle Repair Expense Account or “Repair Expense Recovery” account under Expenses (Credit)
Scenario 3: compensation is due but not yet received
Upon accrual:
- From Other Receivables Account, Due Insurance Claims (Debit)
- To Insurance Compensations Account (Credit)
Upon collection:
- From Bank or Cash Account (Debit)
- To Other Receivables Account (Credit)
Scenario 4: complete asset damage (total loss)
If the asset is completely damaged (for example, a vehicle is a total loss), the fixed asset must also be removed from the records:
- Close accumulated depreciation.
- Record the difference between the book value and the compensation amount as a gain or loss on disposal. See Steps to Sell a Fixed Asset: Calculate Remaining Depreciation, Record Gains and Losses.
It is recommended to coordinate with the company’s accountant in this case to accurately determine the book value.
Tax treatment (value added tax)
Insurance compensations for incidents are not subject to Value Added Tax because they are not consideration for supply, and are recorded without tax, provided that any services or repairs related to the compensation may be subject to tax independently.
