Fire is a loss for any business as their goods burn. In accounting, this loss after the filing must be properly recorded. The goods destroyed by fire journal entry helps to demonstrate in the books as loss. This entry is also used in the case of an insurance claim by businesses. This article will guide you through the journal entries passed for loss of goods in fire with and without insurance. You are going to be shown Enteries in Tally and practical examples. The goods destroyed by fire journal entries are created to record the destruction of goods that catch fire. When companies take such hits, they reflect it in the accounting books. This entry helps keep track of what loss occurred. Then there is also the claim part which gets recorded if the same is insured. It is crucial to have this entry for accurate profit or loss calculation. This knowledge lays the foundation for your journal entry.
What is Goods Destroyed by Fire in Accounting?
Loss is incurred when stock is damaged by fire. In accounting, we refer to it as goods destroyed by fire. This is an event that lowers the value of stock. You do this with a special journal entry. It indicates how much value has evaporated. A journal entry is a continuous assessment for the students and teachers frequently ask questions like goods worth 5000 were destroyed by fire journal entry to evaluate your knowledge.
A fire may breakout in the goods in godown or warehouse. These goods are useless after a fire. The company cannot sell them. So, it is a loss of stock. In accounting, this is reflected by reducing inventory and increasing loss.
This loss can either be of two types:
- Insured loss: If the goods are insured, we can claim money from the insurance company.
- Uninsured Loss: Total amount is Business loss if not insured.
In either case you pass different journal entries. These are standard and adhere to accounting rules.
Journal Entry for Goods Destroyed by Fire
The journal entry of goods destroyed by fire is different if the goods are insured or uninsured. Now let’s see what entries you will pass when goods are destroyed due to fire. First, let’s look at what happens without insurance.
Entry When No Insurance Claim Is Made
When goods are uninsured and burnt, we consider it lost. The journal entry will be:
| Particulars | Debit (₹) | Credit (₹) |
| Loss by Fire A/c To Purchases A/c | ₹X | ₹X |
Explanation:
- We credit Loss by Fire to record the loss.
- Purchases is credited with stock being reduced.
Example:
Goods worth ₹5,000 were burnt to ashes.
Loss by Fire A/c Dr. ₹5,000
To Purchases A/c. ₹5,000
This entry shows you the total loss in books very openly. It is also known as the journal entry of the uninsured goods destroyed by fire.
Journal Entry for Goods Destroyed by Fire and Insurance Claim
In case, in which goods get destroyed by fire, sometimes goods get insured by the company and applicable get the claim against the same. Now let’s see what happens if the goods are insured. The business receives reimbursement from insurance in this instance. The entry has three parts:
Step 1: If the Goods Are Destroyed
| Particulars | Debit (₹) | Credit (₹) |
| Loss by Fire A/c To Purchases A/c | ₹X | ₹X |
This step is the same as before. It indicates that ding goods are destroyed.
Step 2: Insurance Claim Making
Insurance Company A/c Dr.
To Loss by Fire A/c
This line indicates that, we are going to receive some amount of moneyback. It reduces our net loss.
Step3: When You Receive Money from Insurance
| Particulars | Debit (₹) | Credit (₹) |
| Bank A/c To Insurance Company A/c | ₹X | ₹X |
Example:
Fire destroys goods worth ₹10,000 Claim by insurance accepted ₹8,000.
Step 1:
Loss by Fire A/c Dr ₹10,000
To Purchases A/c ₹10,000
Step 2:
Insurance Company A/c Dr. ₹8,000
To Loss by Fire A/c ₹8,000
Step 3:
Bank A/c Dr. ₹8,000
Insurance Company A/c Dr.₹8,000
So, the net loss to business is ₹2,000 (₹10,000 – ₹8,000).
It is the correct goods destroyed by fire and insurance claim journal entry.
Goods Destroyed by Fire Journal Entry in Tally
Tally is widely used accounting software. Generally, when it comes to students, they need to learn the process to make the journal entries made in Tally, for the special case, in which goods are destroyed and the reason behind this is fire and the goods destroyed make a loss to the company. The ledger set required to record the goods destroyed by fire journal entry in Tally.
Steps in Tally
- Indirect Expenses (Loss by Fire) Ledger Creation
- Sundry Debtors or Current Assets Ledger (Insurance Company)
- Create Journal Voucher
Example in Tally:
Step 1: Voucher Type: Journal
Loss by Fire A/c Dr. ₹ 10,000
To Purchases A/c – ₹10,000
Step 2: Dr Insurance Company A/c – ₹8,000
Cr. Loss by Fire A/c – ₹8,000
Step 3: Voucher Type: Receipt
Bank A/c Dr. ₹8,000
To Insurance Company A/c — ₹8,000
These entries in Tally are ideal for recording fire losses. Always enclose supporting bills and claim forms.
Goods Worth 5000 Were Destroyed by Fire Journal Entry
Goods destroyed are company’s abnormal losses. It is to be deducted from the profit and loss account of the company. This is a frequent question where specified quantity is given of the damaged goods and the following journal entry is made in this case:
Question: Goods worth ₹5,000 were destroyed in a fire in No insurance.
Loss by Fire A/c Dr. 5,000
To Purchases A/c ₹5,000
If it was insured, and claim was ₹3,000, then:
Step 1:
Loss by Fire A/c Dr. 5,000
To Purchases A/c 5,000
Step 2:
Record Insurance paid A/c Dr. ₹3,000
To Loss by Fire A/c ₹3,000
Step 3:
Bank A/c Dr. ₹3,000
By Insurance Company A/c ₹3,000
And this applies to all amounts.
Journal Entry for Uninsured Goods Destroyed by Fire
Because of the fact that premiums are not chargeable by the company for the loss when goods are destroyed by fire in certain cases. Where goods are uninsured, full value is a loss. The company receives no return on money spent. These are known as uninsured goods destroyed by fire journal entry
Simple Journal Entry:
| Particulars | Debit (₹) | Credit (₹) |
| Loss by Fire A/c To Purchases A/c | ₹X | ₹X |
There is no step two or three here.
Real-life Situation
For instance, if a small shop in Delhi holds goods of value ₹20,000 and if it gets burnt in fire, the entire business goes in loss. It needs to treat it correctly in its accounts for tax and its final accounts.
Goods Destroyed by Fire Impact on the Final Accounts
The loss has to be added in books of accounts. It is reflected in the profit and loss account and in the company balance sheet as well. This is essentially the cost price of the destroyed inventory. This loss is deducted from the business’s final accounts.
Where it Appears:
- In a Trading A/c close stock by reduce
- Profit and Loss Account: Showing fire loss
- Balance Sheet: Show as an asset if the insurance claim is pending
Points to Remember:
- Always keep fire loss records
- Claim insurance fast
- Record date and proof of fire
- Inform GST authorities about goods that were taxable
Relevance to ACCA Syllabus
This journal entry regarding Goods Destroyed by Fire topic is a part of FA and FR of ACCA. The discussion reinforces your knowledge of loss accounting, inventory adjustments, and insurance treatment, all of which are important topics on the exams and for real-world accounting problems.
Goods Destroyed by Fire Journal Entry ACCA Questions
Q1: Which account is debited when goods are destroyed by fire and not insured?
A. Purchases A/c
B. Sales A/c
C. Loss by Fire A/c
D. Insurance Claim A/c
Answer: C
Q2: Where does the ‘Loss by Fire’ appear in the final accounts?
A. Balance Sheet (Assets Side) Assets
Profit & Loss Account (Dr Side)
C. Trading Account (Cr. Side)
D. Capital Account
Answer: B
Q3: Insurance money received by the business after the goods have been destroyed by fire.
A. Bank A/c Dr —>Insurance Company A/c
B. Bank A/c Dr; To Insurance Company A/c
C. Sales A/c Dr; To Bank A/c
D. Purchases A/c Dr; To Bank A/c (D.)
Answer: A
Q4: What type of account is the “Loss by Fire”?
A. Liability
B. Income
C. Expense
D. Asset
Answer: C
Q5: What would be the journal entry on receipt of claim if ₹ 5,000 worth of goods are destroyed by fire and have been fully insured?
A. Dr Purchases A/c; To Bank A/c
B. Bank A/c Dr; To Insurance Claim A/c
C. Bank A/c debit, credit: Purchases A/c.
D. Capital A/c Dr. To Purchases A/c
Answer: B
Relevance to US CMA Syllabus
Applying Loanable Funds in US CMA This subject is treated in External Financial Reporting. All this is necessary for understanding how to recognize every loss, value the inventory correctly, and deal with abnormal events like fire, which is essential for presenting significant and exact costs and financial statements.
Goods Destroyed by Fire Journal Entry US CMA Questions
Q1: How do goods that are fire damaged affect inventory?
A. Increase Inventory
B. Reduce Inventory
C. Increase Revenue
D. No Impact
Answer: B
Q2: What is partial insurance claim journal entry?
A. Inventory A/c Dr.
B. Loss by Fire A/c Dr. To Insurance A/c.
C. Insurance A/c Dr; To Loss by Fire A/c
D. Fire Loss A/c Debit; To Stock A/c
Answer: C
Q3: How are pending insurance claims at year-end reported?
A. As Liability
B. As Asset
C. As Capital Reserve
D. It is not reported
Answer: B
Q4: What will be the journal entry for balance loss if $10,000 worth of goods are destroyed and $6,000 is recoverable?
A. Loss by Fire A/c Dr. 10,000
B. Dr. Fire Loss A/c $4,000
C. Insurance A/c Dr. $6,000
D. Bank A/c Dr. $10,000
Answer: B
Q5: What type of account is “Loss by Fire”?
A. Direct Expenses
B. Operating Revenue
C. Indirect Expenses
D. Non-Operating Income
Answer: C
Relevance to US CPA Syllabus
In US CPA – FAR (Financial Accounting and Reporting), journal entries to record fire losses fall under inventory accounting and loss recognition. The GAAP treatment for such events is necessary to ensure proper financial statement reporting & audit trail.
Goods Destroyed by Fire Journal Entry US CPA Questions
Q1: How are uninsured fire losses accounted for under US GAAP?
A. As extraordinary items
B. As capital income
C. As expenses
D. As other revenues
Answer: C
Q2: If insurance pays a portion of a claim for a fire loss, what entry is made?
A. Loss by fire A/c Dr.
B Bank A/c Dr: To Inventory A/c
C. Loss by Fire A/cDr; ToInsurance A/c
D. Sales A/c Dr; To Insurance A/c
Answer: C
Q3: Under GAAP, how does a company measure inventory lost in fire?
A. Add to inventory
B. Present as contingent liability
Record as loss when it happens
D. Ignore if not material
Answer: C
Q4: What kind of a loss is a fire-damaged inventory?
A. Revenue Loss
B. Inventory Reserve
C. Write-down Expense
D. Sales Adjustment
Answer: C
Q5: What is the double-entry when you receive insurance proceeds?
A. Insurance A/c A. Bank A/c Dr.
B. Sales A/c Dr. To Bank A/c
C. Inventory A/c Dr. To Bank A/c
D. Bank credit to Revenue credit
Answer: A
Relevance to CFA Syllabus
For CFA Level I – Financial Reporting & Analysis, this discussion deals with inventory write-offs, income statement adjustments, and how non-operating losses affect performance. CFA students have to assess the effects of these happenings on financial ratios and statements.
Goods Destroyed by Fire Journal Entry CFA Questions
Q1: What is the impact on net income of writing off inventory because of fire?
A. Increases it
B. Has no effect
C. Decreases it
D. Depends on insurance
Answer: C
Q2: How the pending insurance claims for fire loss is reflected in IFRS?
A. Expense
B. Asset
C. Liability
D. Not shown
Answer: B
Q3: Which IFRS accounting principle applied in firing loss accounting?
A. Prudence
B. Consistency
C. Fair Value
D. Substance Over Form
Answer: A
Q4: How does fire loss affect inventory turnover ratio?
A. Increases it
B. Decreases it
C. No impact
D. Unpredictable
Answer: A
Q5: How will fire loss affect Return on Assets (ROA)?
A. ROA Increases
B. ROA Decreases
C. ROA Doubles
D. No impact
Answer: B
