How to book insurance payout/reimbursement?

[Brian Lalor]

What’s a good way to book reimbursement for an insurance claim?  It’s not really income, but booking against the category that the premium is paid from doesn’t feel right, either (especially as the reimbursement in this case exceeds the amount spent on the premium for the previous year).  

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Brian Lalor (he/him)

bla...@bravo5.org

[Chary Chary]

I think it has to go either against accounts payable or accounts receivable depending whether you get payment before or after you paid for damage

Like this:

2020-01-18 * "Fixing house water damage from personal money"

    Assets:Checking                        -1000.00 USD

    Assets:AccontsReceivable:Insurance      1000.00 USD ; We know we will get this money back from insurance company

   

2020-02-19 * "Getting payment from insurance companyone month later"

    Assets:Checking                         1000.00 USD

    Assets:AccontsReceivable:Insurance     -1000.00 USD

[Brian Lalor]

Hm, that’s interesting. After starting this thread I thought maybe I’d just book it against Expenses:Home:Repair, but looking at expenses incurred, there are things like lodging and repairs/replacement of non-structural items (like, say, books damaged by water) that are separate from the repair costs to the house.  Should the insurance reimbursement be booked against some kind of Income category? It’s not really income in the salary sense, but that is sort of the path of ingress for “new money”.

— 

Brian Lalor (he/him)

bla...@bravo5.org

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[Chary Chary]

If you want to log it properly, you can't book it neither against expense nor against income.

Say you have received large payment and booked it against income. in this case your net worth has all of a sudden increased, but this is not correct, because you have received it against future or past payments.

If you were a company, then you could be made responsible for financial fraud by making your net worth look better than it is

So, in my example both paying to fix the damage from your bank account and payment from insurance company go against  Assets:AccontsReceivable:Insurance

Suppose insurance covers 100% of your damage, then my scheme insures that your net worth does not change even in the case you spent all of your cash to repair for damage initially (this is because you know you will be reimbursed)

[Chary Chary]

In general, this case is not special for beancount, this is just an accounting question

You can always google (or ask chatgpt) on small business would account for such events, the methodology is 500 years old and is well established

[Paul Walker]

It could depend on the tool and how it presents the case. At first I assumed you'd still send your out of pocket to Expenses, but if the reconciliation doesn't come from Income, your Income/Expense reports may be misleading, not symmetrical. I could see using both Expenses:Insured:Home and subsequently Income:Insurance and then the transactions are easy to filter.

If you don't want to see the deficit reflected in your net worth, I'm warming to the Assets:Receivable idea. You are reasonably expected to receive the funds, as much as your Liabilities are expected to receive back from you. It just seems weird to not send money to Expenses when you're buying (replacement) things/services.

Another option could be to use Equity:Insurance. Literally none of Assets, Income, or Expenses.

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[Chary Chary]

On Friday, June 21, 2024 at 5:53:35 PM UTC+2 wpa...@gmail.com wrote:

If you don't want to see the deficit reflected in your net worth, I'm warming to the Assets:Receivable idea. You are reasonably expected to receive the funds, as much as your Liabilities are expected to receive back from you. It just seems weird to not send money to Expenses when you're buying (replacement) things/services.

I think you method is what is call a cashflow - based accounting and my method is what is called an accrual accounting

https://www.youtube.com/watch?v=eApsfjccm7s

In my experience it is OK to use a cashflow - based accounting for small expenses, which kind of stay on the noise level.

But if you use a  cashflow - based accounting for significant but irregular transactions (e.g. big tax return from the last year, expected big tax to be paid for this year, lending or borrowing a large amount of money), then your net worth starts fluctuating to the level, that you just don't understand what is going on any longer and also can't compare similar periods of different years. But the beauty of a double entry system is that you can remove all this noise and see the true picture by using accrual accounting.

 

[Paul Walker]

Ah, so Accrual focuses on flow of intrinsic value? The intent is that there's ultimately no net out-of-pocket/expense so there shouldn't be any deficit/expense on paper. I like that. I'm convinced on Assets:AccountsReceivable:* instead of Expenses:* for cash-out and cash-in legs of claim. Especially for big claims, probably routine medical claims. Maybe not 1-2% cash back on credit cards... I'll have to look at remodeling some of my own slush accounts.

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[Chary Chary]

On Friday, June 21, 2024 at 9:58:24 PM UTC+2 wpa...@gmail.com wrote:

Ah, so Accrual focuses on flow of intrinsic value? The intent is that there's ultimately no net out-of-pocket/expense so there shouldn't be any deficit/expense on paper. I like that. I'm convinced on Assets:AccountsReceivable:* instead of Expenses:* for cash-out and cash-in legs of claim. Especially for big claims, probably routine medical claims. Maybe not 1-2% cash back on credit cards... I'll have to look at remodeling some of my own slush accounts.

I think you got it. The main idea of  the accrual  accounting is that both expense and income are disconnected in time from cashflow. Presumably it gives a better financial picture of your situation. There are tons of regulations, documents, consultants and auditors who deal with this. Also abuse if relatively easy, because you report on the thing which is difficult to check, some "revenue", which you can't measure on your bank account.  This is not only with cost, but with revenue. Say you have received a downpayment for the work you haven't done yet. Then in accrual you would record it like:

2020-01-01 * "downpayment for the work not done yet "

    Assets:Bank                                        1000 USD

    Liabilities:Unrecognized-Revenue  -1000 USD

2020-02-01 * "50% of work is done"

   Income:Service                                  -500 USD

   Liabilities:Unrecognized-Revenue   500 USD

But as I said, even for personal finances it is very useful. I had a situation, when I was making tax return declaration in 2020 for 2019, but was receiving it in 2021 plus bunch of other delayed or sometimes advanced transactions. You just cannot get your head around the changes to your net worth in such situation, if you do not follow principles of accrual accounting