Financial Accounting · Insurance Claim for Loss of Stock and Loss of Profit

Journal Entries for Loss of Stock by Fire

Updated 10 October 2026 · Fact-checked

When stock is destroyed by fire, you remove the lost stock from the books at cost, record the insurance claim as a receivable, record salvage as stock or cash, and write the remaining uninsured loss off to profit and loss account. Claim is credited when admitted; money received clears the receivable.

Understand Accounting Treatment of Claims and Salvage

Stock lost by fire is an asset that no longer exists. Your books still show it, so you must take it out. The loss is not an expense of trading, so it is not shown in the normal trading account as a purchase or a cost of sales. It is treated as an abnormal loss.

Three things can happen to the value of the stock destroyed. Part of it may be recovered as salvage (damaged goods that still have some value). Part may be recovered from the insurer (the claim). Whatever is left is the net loss, which you bear yourself.

The usual route is to open a Stock Destroyed by Fire Account (also called Loss by Fire Account). You debit it with the cost of stock destroyed and credit the Trading Account. The purchases and opening stock debited in the Trading Account include the lost goods. Crediting the Trading Account removes them from cost of goods sold, so gross profit is not understated. Then you credit the Loss by Fire Account with the claim and the salvage. The balance is the loss, transferred to Profit and Loss Account.

The claim entry is made as a receivable: debit Insurance Company (or Insurance Claim Receivable), credit Loss by Fire Account. When the insurer pays, debit Bank and credit the Insurance Company. If the insurer pays a different amount from the claim admitted, the difference goes to the Loss by Fire Account or Profit and Loss Account.

The amount of the claim comes from the loss of stock computation and the average clause. This page deals only with the entries after that amount is known.

Key rules to remember

Net loss on stock destroyed: Net loss = Gross stock destroyed (at cost) − Salvage value − Insurance claim admitted; Here stock destroyed is the gross figure, before salvage. Salvage is deducted once, here. This is the balance of the Loss by Fire Account and is written off to Profit and Loss Account.
Stock destroyed (cost): Gross stock destroyed = Stock on date of fire (at cost), before deducting salvage; Stock on date of fire is found by preparing a memorandum trading account from the last balance sheet date to the date of fire. If a question gives stock lost after deducting stock saved, that figure is already net of salvage, so do not deduct salvage again.
Entry: removing the lost stock: Loss by Fire A/c Dr; To Trading A/c (stock destroyed at cost); Credit to Trading Account only when the goods are still inside purchases or opening stock in that account. If stock is still in a separate stock account, credit Stock A/c.
Entry: claim admitted: Insurance Company A/c Dr; To Loss by Fire A/c; Record the amount the insurer has admitted or you expect to be admitted, not the amount lost.
Entry: salvage: Salvage Stock A/c (or Bank A/c) Dr; To Loss by Fire A/c; Use Bank if sold for cash. If kept in stock, record at its estimated realisable value.
Entry: claim received: Bank A/c Dr; To Insurance Company A/c; Clears the receivable. Any shortfall from the admitted claim is a further loss.
Entry: loss written off: Profit and Loss A/c Dr; To Loss by Fire A/c; Transfers the balance of the account, which is the uninsured net loss.

How to solve Accounting Treatment of Claims and Salvage questions

Use this order for any question asking you to pass journal entries or prepare the Loss by Fire Account.

1Find the cost of stock destroyed. If the question gives stock on the date of fire, that is the gross figure; salvage is dealt with separately. If the question gives stock lost after salvage, use it as it is. If neither is given, prepare a memorandum trading account.
2Pass the entry removing the lost stock: debit Loss by Fire Account, credit Trading Account (or Stock/Purchases as the question directs).
3Check the claim amount. If the policy is subject to an average clause, use the claim already computed. Do not reapply the clause to the whole stock.
4Record the claim: debit Insurance Company, credit Loss by Fire Account.
5Record salvage, if any is separately given: debit Salvage Stock (or Bank), credit Loss by Fire Account.
6Find the balance of the Loss by Fire Account and transfer it to Profit and Loss Account.
7Record the cash received from the insurer: debit Bank, credit Insurance Company. Handle any difference as an extra loss or gain.
8Write the narration under each entry and show the Loss by Fire Account as a final check.

Quickest way: Three-line T-account shortcut

When to use it: Use this when the question gives you the stock lost, claim and salvage and asks for entries or the loss figure quickly.

Draw the Loss by Fire Account. Put stock destroyed on the debit side.
Put claim admitted and salvage (if separately given) on the credit side.
The balancing figure is the loss to P&L. Write the entries from the account: each credit item has a matching debit to Insurance Company, Salvage or Bank, and the balance goes to Profit and Loss Account.

Common mistakes in Accounting Treatment of Claims and Salvage

Debiting the Profit and Loss Account directly with the whole stock lost
Students treat the fire as a simple expense and skip the claim and salvage.
Fix: Always use the Loss by Fire Account first. Only the net uninsured loss goes to Profit and Loss Account.
Forgetting to credit the Trading Account for the lost stock
The debit side is remembered but the credit is left out, or credited to Purchases by habit.
Fix: Remember the opening stock and purchases debited in the Trading Account include the lost goods. Credit Trading Account to remove them from cost of goods sold, so gross profit is not understated.
Recording the claim at the amount of loss instead of the amount admitted
Students ignore the insurance policy value or average clause.
Fix: Use the claim computed under the policy. If the policy is less than the stock, the claim is reduced.
Treating salvage as a separate profit or ignoring it
Salvage is seen as a small side item.
Fix: Credit salvage to the Loss by Fire Account. It reduces the loss. Do not take it to Trading or P&L separately.
Not adjusting when the insurer pays less than the claim recorded
Students stop once the claim receivable is recorded.
Fix: Bank is debited for the cash actually received. Debit the difference to Loss by Fire or Profit and Loss Account, and close the Insurance Company account.

Worked examples

Example 1

A fire on 30 September destroyed stock of a Pune trader. Stock destroyed, at cost, was ₹5,00,000. Part of the damaged goods was sold as salvage for ₹80,000 cash. The insurance claim admitted was ₹3,00,000. Pass the journal entries and find the loss to Profit and Loss Account.

Show the solution

Gross stock destroyed at cost = ₹5,00,000. Loss by Fire A/c is debited with ₹5,00,000. The ₹80,000 salvage arises from this destroyed stock and is credited separately.
Entry 1: Loss by Fire A/c Dr ₹5,00,000; To Trading A/c ₹5,00,000 (stock destroyed by fire).
Entry 2: Bank A/c Dr ₹80,000; To Loss by Fire A/c ₹80,000 (salvage sold).
Entry 3: Insurance Company A/c Dr ₹3,00,000; To Loss by Fire A/c ₹3,00,000 (claim admitted).
Loss by Fire A/c: Debit ₹5,00,000; Credit ₹80,000 + ₹3,00,000 = ₹3,80,000. Balance = ₹1,20,000.
Entry 4: Profit and Loss A/c Dr ₹1,20,000; To Loss by Fire A/c ₹1,20,000.
Entry 5 on receipt: Bank A/c Dr ₹3,00,000; To Insurance Company A/c ₹3,00,000.

Answer: Net loss written off to Profit and Loss Account = ₹1,20,000.

Example 2

Stock of Mehta Traders costing ₹4,00,000 was destroyed by fire. Salvage of ₹50,000 (estimated realisable value) was kept as stock. The claim admitted was ₹2,80,000, but the insurer finally paid ₹2,70,000. Pass all entries and find the total loss charged to Profit and Loss Account.

Show the solution

Entry 1: Loss by Fire A/c Dr ₹4,00,000; To Trading A/c ₹4,00,000.
Entry 2: Salvage Stock A/c Dr ₹50,000; To Loss by Fire A/c ₹50,000.
Entry 3: Insurance Company A/c Dr ₹2,80,000; To Loss by Fire A/c ₹2,80,000.
Loss by Fire A/c credits = ₹50,000 + ₹2,80,000 = ₹3,30,000. Balance debit = ₹4,00,000 − ₹3,30,000 = ₹70,000.
Entry 4: Profit and Loss A/c Dr ₹70,000; To Loss by Fire A/c ₹70,000.
Entry 5: Bank A/c Dr ₹2,70,000; Profit and Loss A/c Dr ₹10,000; To Insurance Company A/c ₹2,80,000. The short receipt of ₹10,000 is an additional loss.
Total charged to Profit and Loss Account = ₹70,000 + ₹10,000 = ₹80,000.

Answer: Total loss charged to Profit and Loss Account = ₹80,000.

Exam tips

Write the Loss by Fire Account even when only journal entries are asked. It gives you the balance check and often earns marks.
Always add a short narration. Examiners give step marks for the correct accounts and narrations.
Read the question for how salvage is dealt with: sold for cash, kept as stock, or still to be valued. The debit account changes.
In MCQs, the net loss is usually gross stock destroyed less claim less salvage. Calculate it in one line and check the options.
If the question gives stock lost after salvage, do not subtract salvage again.

Practice questions from Insurance Claim for Loss of Stock and Loss of Profit

Accounting Treatment of Claims and Salvage: frequently asked questions

Which account is credited for stock lost by fire?

Credit the Trading Account when the goods are part of the year's purchases and opening stock. This removes them from cost of goods sold. The debit goes to Loss by Fire Account. Follow the question if it says to credit Stock or Purchases.

How do you record an insurance claim received?

When admitted, debit Insurance Company Account and credit Loss by Fire Account. When cash comes in, debit Bank and credit Insurance Company Account. If the amount received is less than admitted, charge the difference to the loss.

Where does salvage go in the books?

Salvage reduces the loss, so credit it to Loss by Fire Account. Debit Bank if it is sold, or Salvage Stock if it is kept for later sale at its estimated value.

Is the loss by fire shown in Trading Account or Profit and Loss Account?

The cost of lost stock is first taken out through Trading Account so gross profit is not distorted. The net uninsured loss is then shown in Profit and Loss Account as an abnormal loss.