AI for Finance & Accounting
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Accounting for Auto Accidents

Accidents happen. Here is how I would use AI to learn what to do in your accounting books when one does occur. As OpenAI Disclaims and I highly recommend, triple check the work that any AI does for you. In this conversation, ChatGPT got the concepts alright, but it made a bad mistake at the end. Read on to see what happened.

First lets start by asking ChatGPT in simple prompts.

I am a CPA. My client is a business that operates a fleet of trucks.
One of their trucks met with an accident and that truck was declared a total loss.
How do I account for this in my client's books?

To that, ChatGPT responded:

To account for the total loss of the truck in your client’s books, here’s how you should proceed:

1. Remove the Truck from the Books

You need to write off the truck by removing its carrying value (original cost less accumulated depreciation).

Journal Entry:

Accumulated Depreciation (Contra Asset) Dr XXXX
Loss on Disposal of Asset Dr XXXX (if applicable)
Truck (Fixed Asset) Cr XXXX
  • The amount debited to Accumulated Depreciation is the depreciation recorded on the truck up to the accident date.
  • The Loss on Disposal of Asset reflects the difference between the truck’s book value and any insurance proceeds received.
  • The Truck account is credited for the original purchase cost.

2. Record the Insurance Proceeds (if any)

If your client received an insurance payout, record it separately.

Journal Entry:

Cash/Bank Dr XXXX
Insurance Recovery/Proceeds Cr XXXX

3. Recognize the Gain or Loss

If the insurance proceeds exceed the truck’s net book value, record a gain. If the proceeds are less, record a loss.

Journal Entry:

Insurance Recovery Dr XXXX
Gain on Disposal of Asset Cr XXXX

OR

Loss on Disposal of Asset Dr XXXX
Insurance Recovery Cr XXXX

✅ Key Considerations:

  • Ensure you reflect the loss or gain on the income statement.
  • If the truck was financed, you may also need to account for any remaining loan balance.
  • Include any deductible paid by the client as part of the loss.

Would you like help preparing specific journal entries with numbers, or calculating the gain/loss on disposal?

To which I asked.

Yes, I would like help preparing specific journal entries with numbers.
The truck was purchased for $50,000 and had accumulated depreciation of $20,000 before the accident.
Insurance agreed to pay $18,000 after a $1,000 deductible.

To which ChatGPT responded.

Here’s how you can account for the total loss with the specific numbers you provided:

🚚 Details:

  • Truck Purchase Price: $50,000
  • Accumulated Depreciation: $20,000
  • Net Book Value (NBV): [ 50,000 - 20,000 = 30,000 ]
  • Insurance Proceeds: $18,000
  • Deductible: $1,000
  • Total Payout: [ 18,000 + 1,000 = 19,000 ]
  • Loss on Disposal: [ 30,000 (NBV) - 19,000 (Total Payout) = 11,000 ]

📚 Journal Entries:

1️⃣ Write off the Truck:

Accumulated Depreciation Dr $20,000
Loss on Disposal of Asset Dr $11,000
Truck (Fixed Asset) Cr $50,000

✅ This removes the truck from the books by clearing its original cost and accumulated depreciation. The $11,000 loss is recognized due to the difference between the NBV and the total payout.

2️⃣ Record the Insurance Proceeds:

Cash/Bank Dr $18,000
Receivable (Deductible) Dr $1,000
Insurance Recovery Cr $19,000

✅ The insurance company pays $18,000, and the $1,000 deductible represents an amount the client paid directly.

3️⃣ Optional: Combine Deductible with the Loss If you want to keep it simpler, you can include the $1,000 deductible in the loss entry instead of as a separate receivable:

Loss on Disposal of Asset Dr $12,000
Insurance Recovery Cr $18,000
Truck (Fixed Asset) Cr $50,000
Accumulated Depreciation Dr $20,000

✅ This also reflects the full $12,000 loss, including the $1,000 deductible.

💡 Final Result:

  • The truck is removed from the books.
  • The loss of $11,000 (or $12,000 if including the deductible in the loss) is recorded.
  • The insurance proceeds are recognized.

Would you like help preparing financial statement impacts or creating a note disclosure for this transaction?

Finally, I asked ChatGPT to give me an excel spreadsheet with the journal entries.

Can you provide me an excel spreadsheet of the transactions you have recommended?

To which ChatGPT responded.

It looks like I made a mistake by not properly aligning the data lengths in the Excel file. Let me fix it and generate the spreadsheet.

You can download the Excel spreadsheet with the journal entries by clicking the link below:

Truck_Total_Loss_Journal_Entries.xlsx

ChatGPT has done a pretty good job of understanding my query, the accounting concepts and Journal Entries needed. It was able to reasonably fill in the gaps that I left. It understood that a truck is a fixed asset and that the accumulated depreciation needs to be removed. It also understood that the insurance proceeds need to be recorded. Without any "grounding" or "priming" it was able to understand the accounting concepts and provide a reasonable response. That is commendable. But! And this is a big but: There is a major error in the Journal Entries that ChatGPT provided. The excel spreadsheet that ChatGPT provided has $50,000 Debits and $69,000 Credits. In another post soon, we will try to fix this error.