Financial Accounting: Principles and Standards

• Financial accounting involves summarizing, analyzing, and reporting financial transactions of a business.
• The field produces financial statements available for public use.
• Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in this information.
• Financial accounting is governed by local and international accounting standards.
• Generally Accepted Accounting Principles (GAAP) provides the standard framework of guidelines for financial accounting within a jurisdiction.
• GAAP includes the standards, conventions, and rules accountants use to record and summarize transactions and prepare financial statements.
• International Financial Reporting Standards (IFRS) is a set of accounting standards developed by the International Accounting Standards Board (IASB).
• IFRS is becoming more widespread in the international business community.
• Financial statements are formal records of an entity's financial activities.
• These statements provide an overview of a business's financial condition and performance.
• Financial statements are used by a wide range of stakeholders.
• Stakeholders use financial statements to make informed economic decisions.

Key Financial Statements

• Key financial statements include balance sheets, income statements, statements of cash flow, and statements of changes in equity.
• The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time.
• The basic accounting equation is Assets = Liabilities + Equity.
• Assets are a company's resources, such as cash, accounts receivable, inventory, and equipment.
• Liabilities are a company's obligations to others, such as accounts payable, salaries payable, and debt.
• Equity represents the owners' stake in the company.
• An income statement, often called a profit and loss (P&L) statement, reports a company's financial performance over a period of time.
• Revenue, expenses, gains, and losses are all accounted for on an income statement.
• Net income (or net loss) is calculated as total revenues less total expenses.
• The statement of cash flows tracks the movement of cash both into and out of a company over a period of time.
• Operating, investing, and financing activities are the three categories of cash flows.
• The statement of changes in equity reconciles the beginning and ending balances of equity accounts.
• This includes retained earnings and contributed capital.

Insurance Claim

• An insurance claim constitutes a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or event.
• The claim process commences upon the occurrence of an insured event, such as an accident, illness, or property damage.
• The policyholder is obligated to promptly notify the insurance company, furnishing comprehensive details pertaining to the incident.
• The insurance company subsequently conducts a review of the claim to ascertain coverage eligibility and assess the magnitude of the loss sustained.
• Claims adjusters are frequently enlisted to participate in the investigation and evaluation process, in some cases.
• They have the authority to inspect damages, interview witnesses, and scrutinize pertinent documentation to ascertain the legitimacy and monetary value of the claim.
• If the claim secures approval, the insurance company disburses compensation to the policyholder, adhering to the stipulations outlined in the insurance policy.

Types of Insurance Claims

• Auto insurance claims commonly arise from car accidents, theft, or damage to vehicles.
• Homeowners insurance claims can encompass losses stemming from fire, theft, vandalism, or natural disasters.
• Health insurance claims are submitted for medical expenses, such as doctor visits, hospital stays, and prescription drugs.
• Life insurance claims are initiated by beneficiaries upon the demise of the insured individual.
• Business insurance claims afford coverage for property damage, liability, and business interruption losses.
• Disability insurance claims furnish income replacement for individuals rendered unable to work due to illness or injury.

Claim Process Steps

• Notification: The policyholder is required to notify the insurance company at the earliest opportunity following the occurrence of the insured event.
• Documentation: Provision of documentation, including police reports, medical records, photographs, and repair estimates, is essential to substantiate the claim.
• Investigation: The insurance company undertakes an investigation to ascertain the underlying cause and extent of the loss incurred.
• Evaluation: The insurance company conducts an evaluation to determine the commensurate amount of compensation warranted for disbursement.
• Settlement: Contingent upon claim approval, the insurance company extends a settlement offer to the policyholder.
• Payment: Subsequent to acceptance of the settlement, the insurance company disburses payment to the policyholder.

Factors Affecting Claim Settlement

• Policy Terms: The terms and conditions delineated within the insurance policy dictate the scope of coverage and delineate any applicable exclusions.
• Policy Limits: The policy limits stipulate the maximum monetary threshold the insurance company is bound to remit for a covered loss.
• Deductibles: The deductible denotes the predetermined amount the policyholder is obligated to remit out-of-pocket before the insurance company assumes responsibility for the residual loss.
• Negligence: In instances where the policyholder's negligence precipitates the loss, the insurance company reserves the prerogative to diminish or outright deny the claim.
• Fraud: The submission of false or exaggerated claims constitutes insurance fraud, a criminal offense punishable by law, and may engender coverage denial.

Common Issues in Insurance Claims

• Claim Denials: Insurance companies retain the authority to deny claims on various grounds, encompassing a lack of coverage, policy exclusions, or the omission of requisite documentation.
• Underpayment: Instances may arise wherein insurance companies underpay claims by undervaluing the quantum of loss sustained or neglecting to incorporate all indemnifiable expenses.
• Delays: Protracted delays in the claim process perpetrated by insurance companies can inflict financial adversity upon the policyholder.
• Disputes: Discrepancies may surface between the policyholder and the insurance company pertaining to the assessed value of the loss or diverging interpretations of the policy's terms.

Financial accounting for insurance claims

• Insurance companies must account for asserted insurance claims.
• Estimating claims involves statistical and actuarial practices.
• Claims are grouped into categories or classes based on the incident type.
• Claims should be reviewed to determine those that are actually payable.
• A claims department assesses all facts and circumstances to decide whether to pay the insured amount to the claimant.
• Insurance firms may maintain a separate provision for loss adjustment expenses associated with settling asserted claims.
• The insurance business is based on paying valid claims according to insurance contracts.