24

Insurance Claims
Introduction
Abusiness may suffer abnormal losses due to different
them. the most common which destroys or causes severe reasons such as fire, theft, burglary, strike, etc. Among
damage to the assets 1like stock, building, plant,
machinery, furniture, etc., is fire. When a fire takes place, the business naturally incurs heavy losses and, in
furn, the normal business operations are disrupted. There may arise a tremendous strain on the working capital
if the business does not possess adequate funds to replace the
assets so destroyed. To cover the risk of loss
from such events, a business may take on an insurance policy with an
The business has to pay insurance premium at regular intervals as per
Insurance Company.
the terms of the agreement the
insurance premium is charged to the Profit and Loss Account as an expense at the
policy matures on the occurrence of any year-end. The insurance
such mishap and the business is entitled to recover from the insurance
company,the full value of the insurance policy or the actual cost of the assets lost, whichever is lower. When
abusiness suffers a loss from an insured event, it has to notify the insurance company
regarding the loss of
the assets and to file a claim for compensation against those losses. Such claims are known as Insurance Claims.
When a fire takes place, to file a claim with the Insurance Company for the loss of assets damaged or destroyed,
a set of procedures is to be followed. Apart from the legal formalities, one of the most important problems that
abusiness has to face is the determination of the amount of the claim to be lodged.
Types of Claims
Dusiness takes a fire insurance policy tocover (i) the loss of assets including stock; and (ii) loss of profit
Onsequential loss). A business may take insurance policy for loss of cash due to theft or misappropriation.
Wnen a fixed asset is destroved, the computation of loss is simple. The value of such assets on the date of
nbe ascertained fromn the books of account of the business because most of them usually maintain proper
sOf the fixed assets, Fixed assets are recorded in the books of accounts at their acquisition cost, which
becomes the basis for calculation of claim for the loss of fixed assets.
When
a stock is destroyed the computation of loss is not so simple because the prices of different items of
ConeSeldom stable and are acquired at varying rates. For most of the businesses, particularlyfor trading
ms, stock taking is not m¡intained up to date. Therefore, at the time of accident no readymade value of
 NYinaanlable lthe Stock Register is maintained properly, the value ofstock lost tby fire
RhNn M ,the business may face aproblem, even when the Stock Register is can be
i h t avvmuntare also destroyed along with the stock. maintained up astco ertained
daie,
Loss of Stock Policy
lhw an Io steps for determination of claim for loss of stock:
(W Ascertainment of the value of stock on the date of fire; and
( Asoetainment of actual amount of claim to be lodged.
1. Ascertainment of the Value of Stock on the Date of Fire
Mhen it is not possible to ascertain the exact value of stock (destroyed by fire) from the
Stock
\alue of stock onthe date of fire can be ascertained by constructing a Memorandum Trading Regster, the
Rnod starting from the first day of the accounting period and ending on the date of fire. The Account
spermen of the Memorandum Trading Account. following is a
Memorandum Trading Account
Dr.
For the period from 1st day of the accounting year to the date of fire
Particulars Particulars C
To OpeningStock By Sales
To Purchases Alc Less: Return Inwards
Less: Return Outwards By Closing Stock
To Direct Expenses Ac (Balancing figure)
ToCariage Inward Alc
To Wages Ac
To Gross Profit (% on sales)

The different items of the above Memorandum Trading Account are gathered as
follows:
Debit Side
() Opening Stock: It isnothing but the closing stock of the last accounting
period.
ascertained from the Balance Sheet of the last accounting [Link], it can be
(ü) (a) Purchases: These can be ascertained from the Purchase Day
Book (credit purchases) and Cash
Book (cash purchases).
(b) ReturnOutwards: It can be ascertained from the Return
Outwards Book.
(i)Direct Expenses: These can be ascertained from the Cash Book.
(iv) Carriage Inwards.: It can be ascertained from the Cash Book.
(v) Wages: These can be ascertained from the Wages
Register and Cash Book.
(vi) Gross Profit: It is calculated on sales, based on usual
gross profit percentage of the last few yeas.
In the examination, sometimes readymade gross profit
to be calculated on the basis of given information. Generally.,percentage may not be available. In that vas,
information
At the time of calculation of gross profit percentage on sales, allthe necessaryis related to last must
adjustments accounting
be madeyfor:
(i) the slow moving items;
(i) goods distributed as free sample;
(ii)goods taken by the proprietor/partners for
(iv) over-valuation or under-valuation personal use; and
of stock.
Credit Side
() (a) Sales: These can be ascertained from the Sales Day Book (credit sales) and Cash Bookk((cashsales).
)(b) Return Inwards: It can
be ascertained from the
The difference between the debit side total and creditReturn Inwards
side total of [Link] Trading Account
represents the estimated closing stock on the
date of fire.
 Modern Accountancy -I 24.3

Asscertalnment
of Actual Amount of Claim to be Lodged
2. to be compensated by the insurance company is always stinulated in the insurance policy.
amount tofloss circumstances, the claim for loss can exceed overthe actual loss suffered by the business. When
compensated by the insurance company for the loss of stock. the insurance company
The no
under
fullv
is
the stock, salvaged (saved), if any.
but
owner of the time of fire.
b u s i n e s s

the
beomesthe Trading Account showsthe value of stock which is supposed to exist at stock salvaged
Memorandum
of
The the actual amount of claim to be lodged, we have to deduct the value
Memorandum Trading
ascertain

ascertained from the

to
Therefore,
value of closing stock on the date of fire, as
estimated

from
the
actualamount
of. claim to be lodged is as follows:
The
A c c o u n t .

Statement of Claim for Loss of Stock as on ...

per
Memorandum Trading AccOunt)
of Stock(as business)
(Retained bythe
value
Book
Salvaged
Less:

lodged)*
(claim to be
Loss of Stock
Illustration S)
(discussed after
clause
*Subiect to average The value
destroyed.
considerable part of the stock was
Mustration 1 2018 and a
MrX on June 15, date of fire
Cen occurred in the premises of the purchases up to the
valued at 45,000: years, the
during the past five
4,000.
stock saved was April, 2018 the stock was was found that
ofthe Ist investigation, it
disclosed that on
The books
and the sales to ? 1,80,000. On insurance company
in respect
1.25,000 the
Rounted to 30%. should claim from
profit on
sales was
statement showing
the amount Mr X (B. Com(Delhi-Adapted]
average gTOss prepare a
to
You are required fire.
destroyed by the
of stock Cr.
Mr. X 2018
April to 15th June,
period 1st
Account for the Particulars 1,80,000
Solution Trading
Memorandum
44.000
Dr. 45.000 By Sales
Particulars (Balancing figure)
1,25,000By ClosingStock 224,000
To Opening Stock 54,000
To Purchases Alc 1,80,000)
(30% on sales of 2,24,000

To Gross Profit 15th June,

2018
on
for Loss of Stock as 44,000
Statement of CIlaim 4,000
ParticularS
40,000

Book value of Stock

Less: Salvaged following
particulars:

Claim to be Lodged fire showed I the

Records
saved from
2018. Particulars 7.20,000
MMustration 2 on 15th June, 1,80,000
caught fire the year
2017 2018
Ltd. returns for June 15,
The godown of Purple Sales less from
January 1 to
2018
246,000
Particulars
60.000
Purchases
less returns January 1to June 15, 16.200
84.000 returns from 2018
Stock at cost on 1st January, 2017 5.08,000
Sales less
January 1 toJune 15, Ltd
Wages from by Purple
Stock at cost on 31st December,2017 20,000 was
retained
7,200 and it
Purchases less returns for the year 2017 was worth
salvaged
Wages for the year 2017 rate. The
stocks
uniform
of claimn.
Gross profit remained at a Show the
amount

The godown was insured.

24.4 Insurance Claims

Solution Purple Ltd.

Dr. Memorandum Trading Account for the period 1st January to
15th June on4
Particulars
Particulars C.
To Opening Stock 84,000By Sales
To Purchases Ac
1,80,000By Closing Stock (Balancing figure) 2.46 00
16.200
To Wages AVc
To Gross Profit (30% on sales of 2,46,000) 73,800
3,54,000
15th June. 2018
Statement of Claim for Loss of Stock as on
Particulars
Book value of Stock
-
Less: Savaged
1,08,000
1200
Claim to be Lodged 1,00,800
Working Notes: December, 2017
Dr. (1) Trading Account for the year ended 31st Cr
Particulars
Particulars
60,000 By Sales
To Opening Stock 5,08,000By Closing Stock 720,00
A O00
To Purchases AWc
To Wages Alc 20,000
2,16,000
To Gross Profit (Balancing figure)
8,04,000 8,04,0
(2) Rate of gross profit =2,16,000R 7,20,000 x 100 = 30%.
llustration 3
company for re-sale and stock eaes
The fire insurance policy taken out by Sultan Limited included stock purchased by the
sent by the supplier.
to the company on approval for which a pro-forma invoice was and you have been asked to prepare the claim for sbmission
A disastrous fire took place at the warehouse on 1.10.2018
Limited were destroyed by the fire. but the
to the insurance company. Unfortunately, many of the records of Sultan
following information was available:
(a) Value of stock salvaged after the fire 68,640.
(b Goods supplied on approval and lost in the fire4,000.
(c Sales for nine months to 30.9.2018, 7 6,26,500.
(d) Purchases for nine months to 30.9.2018, 6,02,100. the stock sheets it was found that the
(e Stock (as per accounts)at 31.12.2017, 1,65,206 - but on examination of
stock had been undervalued by ? 7,534.
20% -it was expected that this rate would have been
(f) The average rate of gross profit during last few years were
maintained during the year 2018.
Show the claim that you would submit to the insurance company.
Solution Memorandum Trading Account forSultan
the
Limited
period 1st January to 30th September, 2018
Cr
Dr.
Particulars Particulars 626,500
To OpeningStock 1,65,206 By Sales 273,640

Add: Undervalued Stock 7,534 1,72,740 By Closing Stock (Balancing figure)

ToPurchases 6,02,100
To Gross Profit (20% of 6,26,500) 1,25,300 900,140
9,00,140
Statement of Claim for Loss of Stock as on 30th September, 2018
273640

Particulars 686A0

Book Value of Stock

2 0 5 0 0

Less: Salvage 400

209000

Add: Goods received on approval and destroyed by fire

Claim to be Lodged
 Modern Accountancy - I 24.5

llustration 4
August,
2017 the premises and stock of a firm were totally destroyed by fire, the books of accounts, however,
On 3Ist
saved. In
order to make a claim ontheir fire policy, they ask you to advise on the basis of the following information.
were hand has always been valued at 5% below cost
in
Thestock 2017-18()
Particulars 2014-15 () 2015-16(3) 2016-17 ()
36.100 39,900
as valued 22,800 30,400
Opening Stock
1.20,000 41,000
Purchases less retuns 91,000 1,10,000
1,86,000
75,000
Sales less returms 1,40,000 1,70,000
34.200 12,000
28,400 31,200
Wages
30,400 36,100 39,900
Closing Stock

statement for submission to the insurance comparny in supportof your claim for
loss of stock. The company
Prepare a
account every year on 31st March.
closes its books of [CS. (Inter)-Adapted]

Cr.
Solution Memorandum Trading Account for the period 1st April to 31st August, 2017
Dr Particulars
Particulars 75.000
To Opening Stock 42,000 By Sales 35,000
Returns 41,000 By Closing Stock (Balancing figure)
ToPurchases less 12,000
To Wages 15,000
75,000) 1,10,000
ToGross Profit (20% of 1,10,000

Statement of Claim for Loss of Stock as on

31st August, 2017
Particulars 35,000
Ni
Book Value of Stock
35,000
Less: Salvage
Stock
Claim for Loss of
Cr.
Working Notes : year ended 31st March, 2015, 2016 and 2017
Dr. (1) Trading Account for the 2014-15 2015-16 2016-17
2016-17 Particulars
Particulars 2014-15 2015-16
1,40,000 1.70,000 1,86,000
38.000 By Sales less Returns
24,000 32,000 32,000 38,000 42,000
ToOpening Stock (Note 2) 91,000 1,10,000 1,20,000 By Closing Stock (Note 2)
To Purchases less Returns 28,400 31,200 34,200
To Wages 28,600 34,800 35,800 2,08,000 228,000
To Gross Profit (Balancing figure) 1,72,000
2,08,000 2,28,000
1,72,000 value of stock is :
accounts at 95%. Therefore, actual
below cost. It means
stock is shown in the
(2) Stock is valued at 5%
100 =24,000
14-15 -22,800 /95 x
(i) Opening stock of 20 100 =32,000
2014-15 -30,400/95 x
(i) Closing stock of 100 =38,000
2015-16 -36,100/95 x
(i) Closing stock of 39,900/95 x 100 =42,000.
2015-16
(iv) Closing stock of
(3) Rate of Gross Profit :
100 =20.43%
2014-15 -28.600/1.40.000 x
x 100 = 20.47%
2015-16 -34.800 /1.70.000
100= 19.25%o
2016-17 735.800 /1.86.000 x + 19.25 20.05% Say, 20%.
20.43 + 20.47
Average Rate of Gross Profit = 3

damaged. The firm

had made up accounts to
Illustration 5 January, 2018 and the
stock was
13,27,200 as against
9,62,200 on 31lst
The premises of XLtd caught fire on 22nd stock at cost was
31st March each yeaar March, 2017, the
and on 31st
March, 2016.