Journal Entry of Goods loss by fire in Accounting

Journal Entry of Goods loss by fire in Accounting

Goods are Nominal by nature. When goods are lost by fire it means we have to reduce our purchase in the books of accounts as our goods are no more remains with the business and goods are loss by fire which means we lost our goods.

 

Rule of Nominal Accounts :

  1. Debit all expenses and losses
  2. Credit all income and gains
Note: We reduce our Purchase as goods are no more with the business so we need to deduct it and to deduct The accounts which we have Debited earlier need to be credited later Similary The account which we Credited earlier need to be Debited later..
Loss by fire is nominal Accounts and we have to follow the rule of Nominal Account with loss by fire.

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When we purchase goods are nominal in nature therefore when they are purchased we debit purchase accounts because goods purchase is our expense and as per the Nominal rule we have to debit all expenses and losses.

When Goods are purchased

Purchase A/c Dr.   XXXX

To Bank A/c           XXXX

(being goods purchased)

Similarly, when we sell goods we Credit our sale accounts means we are adding profit to our purchase and sale to customer, and as per Nominal Accounts Credit all income and gain. .We are opening Sale Accounts in place of Purchase Accounts because Sale includes profit which is added to purchase and while selling we use Sale accounts.

Bank /Cash A/c Dr      XXX

To Sale A/c                   XXX

(being goods sold)

In case of Goods loss by fire

This means the goods which we purchase witch are with use are no more with us and we got loss and as the loss is by Loss by Fire, therefore, new nominal Accounts Loss by fire need to be open and reduce the value of goods by crediting Purchase accounts in the books of accounts.

Note Purchase is also nominal accounts in this case we are reducing our purchase in Books of accounts. Loss by FIre is Nominal and here we follow the rule of Nominal Accounts

Loss By Fire A/c             XXX

To Purchase A/c              XXXX

(being Goods loss by fire)

Goods loss by Fire in Profit and loss Accounts

Loss of goods by fire is profit and loss Accounts

When goods are loss by fire they are loss by nature therefore they will be shown in  the debit side of Profit and Loss Accounts

Particular

Amount

Particular

Amount

To Loss By fire A/c

XXXXXX

 

 

Insurance company claim in the loss by fire

Example suppose goods by fire on 10 May was Rs 50,000 and on 10 June Insurance company give claim of  50% of goods then the journal entry for the same will be

 

When goods are destroy

 

Loss by Fire A/c Dr

50,000

   To Purchases

    50,000

 When Insurance company give claim of 50% of goods

Bank A/c  Dr

25,000

 To Insurance company

      25,000

 

Adjustment at the end of accounting year.

Profit and Loss A/c Dr

25,000

Insurance company

25000

       To Loss of goods by fire

    50,000

 

Note here our actual loss is Rs 25000 which will be shown in profit and loss accounts and in trading accounts loss will be shown 50,000 and balance sheet Insurance will be shown in the asset side 25,000.

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