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What is the treatment of insurance claim in cash flow?
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What is the treatment of insurance claim in cash flow?
Treatment of Insurance Claim in Cash Flow
Insurance claims are amounts that an insured party receives from an insurance company. The treatment of insurance claims in cash flow depends on the type of insurance claim and the accounting method used by the company. Here are the different treatments of insurance claims:
Cash Receipt Method
Under the cash receipt method, insurance claims are recorded as cash inflows in the period in which they are received. This method is usually used for small claims or claims that are received shortly after the event that caused the loss. Here are the steps involved in the cash receipt method:
- Record the insurance claim as a cash inflow on the date it is received
- Reduce the value of the asset that was damaged or lost by the amount of the insurance claim
Accrual Method
The accrual method is used for claims that are not received until a later period. Under this method, insurance claims are recorded as accounts receivable in the period in which they are incurred. Here are the steps involved in the accrual method:
- Record the insurance claim as an accounts receivable on the date it is incurred
- Reduce the value of the asset that was damaged or lost by the amount of the insurance claim
- Record the payment of the insurance claim as a cash inflow in the period in which it is received
Off-Balance Sheet Method
The off-balance sheet method is used when the company has an agreement with the insurer to settle the claim directly. Under this method, the insurance claim is not recorded on the balance sheet, but rather as a reduction in the liability owed to the insurer. Here are the steps involved in the off-balance sheet method:
- Record the insurance claim as a reduction in the liability owed to the insurer
- Record the payment of the insurance claim as a reduction in the cash outflow
Conclusion
The treatment of insurance claims in cash flow depends on the accounting method used by the company. It is important for companies to choose the appropriate method to ensure accurate financial reporting.
Community Answer
What is the treatment of insurance claim in cash flow?
Cash from Investing Activities include cash flows from long term investments and sale or acquisition or generation
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What is the treatment of insurance claim in cash flow?
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What is the treatment of insurance claim in cash flow? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about What is the treatment of insurance claim in cash flow? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What is the treatment of insurance claim in cash flow?.
What is the treatment of insurance claim in cash flow? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about What is the treatment of insurance claim in cash flow? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What is the treatment of insurance claim in cash flow?.
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