Loss due to fire in factory is recorded in the ______________.
Last updated Jun 24, 2026
Correct Answer:
Option C —
profit and loss statement
How the Transaction is Recorded
When a fire occurs, the accounting treatment usually follows two or three steps depending on whether the stock was insured:
Credit the Trading Account: The value of the goods lost is credited to the Trading Account (as "Loss by Fire") because those goods are no longer available for sale.
Debit the Profit & Loss (P&L) Statement: The actual loss amount is debited to the P&L statement as an expense/loss.
Insurance Claim (If applicable): If the insurance company admits a claim, only the net loss (Total Loss minus Insurance Claim) is debited to the P&L statement. The claim amount itself is shown as an asset in the Balance Sheet until it is paid.
Why the other options are incorrect:
A) Balance Sheet: The Balance Sheet shows the financial position (Assets and Liabilities) at a point in time. While a pending insurance claim might appear here, the loss itself must be closed out in the P&L statement.
B) Insurance Account: This is a temporary account used to track the claim process, but it is not the final "home" for recording the loss.
D) Factory Account: Usually, "Factory Account" refers to Manufacturing or Trading accounts. While the credit entry happens here to adjust inventory, the final "recording" of the loss impact is in the P&L.
Answer verified by Quintessence Classes faculty — Karan Nagar, Srinagar.
