Journal Entry of Goods loss by fire in Accounting

Table of Contents

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 :

Debit all expenses and losses
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.

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)

Loss by fire in Trading Accounts

Loss by fire means our goods are destroyed therefore we have to deduct the value of goods in our Trading accounts and deduct it from the purchase

Particular

Amount

Particular

Amount

To Purchase XXX

– Loss by fire xxx

xxxx

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

Example suppose goods by fire on 10 May 21was Rs 50,000 and on 10 June 21 Insurance company give claim of 50% of goods then the journal entry for the same will be

When goods are destroyed

Date	Particular	Amount	Amount
1 may 21	Loss by fire	50000
	To Purchase		5000
(being goods loss by fire)

When send for claim to Insurance company

Date	Particular	Amount	Amount
1 may 21	Insurance company	50000
	To loss by fire		50000
(Being goods loss by fire)

When insurance company give claim 50%.

Date	Particular	Amount	Amount
10 June 21	Bank A/c	25000
	Profit and Loss A/c	25000
	To Insurance Company		50,000
(being claim adjusted with profit and loss accounts)

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

Loss goods by fire Under GST Journal entry

Example :

Purchase good Rs 20,000 from local A ltd and GST paid Rs 5%.

Now the journal entry for the same will be

Purchase A/c Dr	20000
Input CGST	500
Input SGST	500
To A ltd	21,000
(being goods purchased from A Ltd
When goods are destroyed by fire ITC is not available on goods lost, stolen, destroyed, or written off
A New Loss by the fire under Nominal account is opened
Loss By Fire A/c Dr	21,000
To Purchase A/c	20000
To Input CGST	500
To Input SGST	500
(being goods destroy by fire and ITC not available as per Law)

FAQ

loss by fire is an example of__________

Ans: Abnormal Loss

What is Abnormal Loss ?

An abnormal loss refers to a situation where a business or firm is making profits below the normal limits.
In an abnormal loss situation the total revenue of a business does not cover total cost incurred for the business.
Example of Abnormal Loss
1. Loss by Fire
2. Loss by theft
3. Loss by breakage
4. loss on mishandling of goods

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