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 :
- Debit all expenses and losses
- Credit all income and gains
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