All parties involved in a business income (BI) loss claim, adjusters especially, must have a basic command of financial accounting concepts to ensure that the policyholder is properly indemnified for his or her loss.
To fairly value a business income loss claim, for instance, an adjuster must understand how a policyholder captures economic transactions on financial statements.
Financial accounting focuses on the reporting of an entity's financial position and results of operations. The two general reports serving these functions are the balance sheet and income statement1, respectively. Under generally accepted accounting principles (GAAP),2 financial statements record assets and liabilities at their cost; revenue when earned; and expenses when incurred. If these accounting principles are followed, then the balance sheet will truly reflect the policyholder's assets, liabilities, and owner's equity at the date of the report. Whereas, its income statement will reflect revenue, expenses, and net profit over a certain time period.
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