CA Preksha Choraria

Preksha ChorariaINSURANCE- Contract of Indemnity

INSURANCE CLAIM- Demanding reimbursement of loss of stock from insurer which is suffered by insured (claimant)

LOSS OF STOCK- Damage or destruction of merchandise that a business has on its hand

♠ Example:

 Policy Amount(Rs.)Value of Stock(Rs.)Loss of Stock(Goods destroyed

) (Rs.)

Claim(Rs.)
(A)1,00,0001,00,0001,00,0001,00,000
(B)1,00,0001,00,00080,00080,000
(C)1,00,0001,20,0001,20,0001,00,000
(D)1,00,0001,20,00060,00050,000
(E)1,00,0001,20,00060,00060,000

♠ CALCULATION OF LOSS OF STOCK:

PARTICULARSAMOUNT(RS)
Value of stock on the date of destructionXX
Less: Value of Salvage (Goods saved from destruction)XX
LOSS OF STOCKXX

♠ DETERMINATION VALUE OF STOCK ON THE DATE OF DESTRUCTION:

1. From Stock Records

2. If stock records are destroyed, then prepare trading account on the date of destruction by taking previous years Gross Profit rate into account. Value of stock will be balancing figure in the trading account.

3. If books of accounts are destroyed then obtain information from debtors & creditors and prepare an estimated statement determining value of stock.

♠ AMOUNT OF POLICY=Sum assured by Insurance company

Gross Profit Ratio= Gross Profit * 100 / Sales

While solving questions in exam one may not be given GP rate of previous year. In such case one need to first prepare trading account of previous year keeping in mind following points and then prepare trading account of the year of destruction:

1. Take opening and closing stock AT COST.

2. GP rate should be calculated on Normal Sales only. Abnormal item should be separately shown.

3. Show all direct expenses like wages, carriage inward etc. on debit side of Trading A/c.

4. Goods taken for personal use, Goods distributed as free samples or Goods stolen shall be shown on credit side of trading A/c AT COST.

Sometimes GP rate is given on cost in question then convert it into GP rate on sales by following method:

GP on COSTGP on SALES
100% on cost (1)50% on sales (1/2)
50% on cost (1/2)33.33% on sales (1/3)
33.33% on cost (1/3)25% on sales (1/4)
25% on cost (1/4)20% on sales (1/5)
20% on cost (1/5)16.67% on sales (1/6)

If Selling Price or Cost price changes in the year of destruction (i.e. current year) then one needs to calculate REVISED GP rate to prepare trading account on the date of fire.

E.g. Selling Price has increased by 10% in the current year. Previous year GP rate is 20%. Find Revised GP.

 

SPCPGPGP (%)
Previous Year100802020
Current Year110 (100*1.1)803027.27

Note:- To avoid calculating revised GP rate one can bring the trading a/c figures of year of destruction at parity with previous year figures by nullifying the changes. The value of stock on the date of destruction received will be at previous year figures which will be changed to bring it at current prices. E.g. In 2003 GP rate was 20%. In 2004 fire occurred. Cost Price increase by 10% and selling price rose by 5% in 2004. Figures of 2004 are:

Opening Stock- Rs.40,000

Purchases- Rs.1,10,000

Sales-Rs. 1,05,000

Find value of stock on the date of fire.

Answer:-

ParticularsAmountParticularsAmount
To Opening Stock40000By Sales (105,000/1.05)100000
To Purchases (110,000/1.1)100000By Closing Stock (Bal. Fig.)60000
To GP @ 20%20000

Value of stock on the date of fire is Rs.66,000 (60,000*1.1).

Posted Under

Category : Finance (3067)
Type : Articles (10791)
Tags : insurance sector (30)