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.
An income statement may be recorded on a cash basis, accrual basis, or other basis of accounting. If transactions are recorded on a cash basis, then revenue is not recorded until it is collected and expenses are not recorded until paid. If they are recorded on an accrual basis (GAAP), then revenue is recorded when earned; expenses are recorded when incurred.
- Fixed expenses (accounting) are operating expenses that do not vary directly with the volume of business (sales and/or production). Examples may include insurance, rent, administrative salaries, and interest. Some income statements may segregate fixed expenses from variable expenses; whereas, others will categorize all expenses together as operating expense.
- Continuing expense (insurance) examples include officer and key employee salaries, administrative expenses, advertising, office expenses, and other fixed overhead. A significant difference from fixed expense is that continuing expenses reflect only the portion of the fixed expense that continues to be incurred during the interruption period. Some fixed expenses, such as administrative salaries, advertising, rent and utilities, may decrease or discontinue during an extended period of interruption.
- Variable expense and costs (accounting) are expenses that vary directly with sales and or production volume. Examples include direct labor, direct materials, sales commissions, credit card bank fee charges, and certain overhead costs.
- Semi-Variable expense and costs (accounting) are expenses that have a fixed and variable component. Examples are utilities, tools, supplies, and maintenance.
- Non-Continuing expenses (insurance) are expenses that do not continue to be incurred during the period of interruption. These are typically variable expenses but may include some fixed expenses during an extended period of interruption.
- Direct labor (accounting) is labor directly utilized in the production of a product. This cost is typically located in the cost of goods sold section of an income statement.
- Ordinary payroll (insurance) is payroll costs, including payroll taxes and other related benefits, for hourly employees who are not considered key employees. These expenses may diminish or discontinue during an extended period of interruption.