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.

.

 

 

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