1. Abnormal loss of stock can be due to theft, fire or other natural calamity and there may be three circumstances
Ø When stock is fully insured
Ø When stock is un-insured
Ø When stock is partially insured
The most important thing in this is how to record the same in the books of account. In this connection two important points need consideration:
1. The loss of stock should be valued at cost and not at market price.
2. The closing stock should be valued at cost after the considering the loss i.e. the closing figure should be net of loss.
2. Accounting Entries for losses with or without insurance claims: When stock is fully insured and full claim is accepted at cost price:
| 1. | Entry when loss takes place | Insurance claim Dr. To loss of stock a/c ( at cost) |
| 2. | When loss of stock is transferred to trading account | Loss of stock Dr. To trading Account |
| 3. | When claim is lodged with the insurance company say united India insurance company limited | United India Ins co. ltd Dr. To Insurance Claim a/c |
When stock is partially insured and claim is partially accepted:
| 1. | Entry when loss takes place | Insurance claim Dr.
Loss of stock not recoverable Dr. To loss of stock a/c ( at cost) |
| 2. | When loss of stock is transferred to trading account | Loss of stock Dr. To trading Account |
| 3. | When claim is lodged with the insurance company say united India insurance company limited | United India Ins co. ltd Dr. To Insurance Claim a/c |
| 4. | The loss not recoverable is transferred to profit and loss account | Profit and loss A/c Dr. To Loss of stock not recoverable a/c |
When stock is uninsured:
| 1. | Entry when loss takes place | Loss of stock not recoverable Dr. To loss of stock a/c
( at cost) |
| 2. | When loss of stock is transferred to trading account | Loss of stock Dr. To trading Account |
| 3. | The loss not recoverable is transferred to profit and loss account | Profit and loss A/c Dr.
To Loss of stock not recoverable a/c |
3. Other types of thefts and frauds
a) Cash theft
Theft of cash can be classified into two groups:
I) Skimming;
II) Larceny.
The distinction between the two lies in the timing – larceny is the theft of cash that the company has already accounted for, and skimming is the pocketing of money before the company has the opportunity to account for it. Perceptibly, skimming will be trickier to identify because there is no direct audit trail.
Skimming can occur through
I) Unrecorded sales (cashiers or accountants put cash in their pockets and not properly record them in the cash book),
II) Understated sales (have the customer pay full price, then enter a discounted sale in the accounting records), and
III) Theft of funds from incoming mail or receipts. Cash
businesses are more prone to skimming than businesses paid by check, credit card, or electronic transfers. Checks that are being methodically stolen are frequently deposited in false company accounts that have a similar name but belong to the thief, not the company.
Effects of skimming:
Skimming will always cause overstatement of other assets, either accounts receivable or inventory. If the skimmer has access to accounting records and can adjust the overstated accounts, the adjustment will usually manifest itself in a rise of cost of goods sold and lower than expected margins.
Cash larceny will be detectable if the accounting records are appropriately maintained and analyzed. The larceny occurs at the points in the business where there is cash, usually at the cash counters, the check deposit counters, or deposits in transit. Cash larceny should become apparent during cash register or bank account reconciliation procedures, and then the question becomes, “Who did it and where are they now”?
b) Non-cash assets
There are two ways to misappropriate a non-cash asset –
I) Steal it or
II) Misuse it.
Stealing of inventories and other items: The theft of inventories or assets is as critical as theft of cash. Theft of inventory will manifest (noticeable) as overstated accounts receivable if the thief manipulates sales documents, or inventory shrinkage and lower gross margins if the inventory is just taken. The theft of assets can take place in the form stealing of stationery items, computer parts etc.
Misuse: Company cars, Stocks, telephones, computers, office equipment, and supplies are often the items most misused. Often these will occur in conjunction with theft of time (doing personal shopping on the Internet or running a business on the side during work hours). Misuse of company assets is usually immaterial, and some businesses even consider it a perk of employment. Material misappropriation can often be detected by reviewing long-distance phone bills, copy machine meters, supply usage, Internet access, etc.
c) Fraudulent disbursements
Fraudulent disbursements generally look just like legitimate company activity, and can include:
1. forged checks,
2. false invoices or expense reports, 3. false timecards,
4. ghost employees or
5. vendors,
6. fraudulent or overstated refunds or credit memos,
7. false voids,
8. overstated commissions,
9. Unauthorized use of company credit cards or telephones, 10. Kickback schemes, etc.
How it is perpetrated:
The thief in this case uses a lawful company function for an illicit purpose. Forgeries usually engage changing a name on the payout, the amount of the payout, the destination of the payout, or the authorizing signature. More elaborate schemes include the forgery of documentation that supports the disbursement.
JOURNAL ENTRY:
| 1. | Entry when loss takes place | LOSS OF CASH Dr. To CASH a/c |
| 2. | When claim is lodged with the insurance company say united India insurance company limited |
United India Ins co. ltd Dr. To LOSS OF CASH a/c |
FRADULENT DISBURSEMENTS AND SKIMMING
In this type of fraud the Cashier or Accountant:
1. firstly issues fake invoices in the name of the company and;
2. Then obtains checks and deposits them into a fake account operated by him.
3. The effect of this type of fraud is that stock is actually reduced but neither sale is recorded nor cash is received.
4. The moot point is that whether sale should be recognized in the books of the company when there is actually no sale (on detection of the fraud).
5. in our opinion the following should be the correct procedure for accounting the above transactions:
| Sl. No. | Particulars | Effect | entry |
| 1 | Effect on sale | The sale should not be recognized upon detection, because AS 9 Para 11 clearly states that “the sale is to be recognized upon transfer of goods by the seller to the buyer and no significant uncertainty exits regarding ultimate collection of the consideration” | Fraudster’s a/c……… .. Dr To Stock Mis appro. A/c (the transaction should be valued at its market value at the time of fraud) |
| 2. | Effect on stock | The closing stock should not be adjusted to bring to it current value because it will be adjusted only when the sale is recognized | No entry |
| 3. | Effect on gross profit | There will be no effect on gross profit | No entry |
| 4. | Effect on VAT | No VAT is payable until the sale is recognized | No entry |
| 5. | When sale to be
recognized |
Only when there is a court order in the favor of the company and the collection of sale consideration is confirmed. | Stock Mis. App……… a/c Dr. To sale a/c |
| 6. | Suppose the court orders to cut down the sale
value to 75% then what to do |
Reverse the 25% sale value and then recognize the sale | Stock mis app A/c….. Dr To Fraudster a/c (25% value reversed) |
| Stock Mis. App……… a/c Dr. To sale a/c (recognize 75%) sale value) |
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| 7. | Suppose
court gives verdict against the company and the fraudster is set free then what to do |
Bring the original entry at cost and then transfer the fraudster a/c to profit and loss a/c | Stock mis app A/c…… Dr To Fraudster a/c (reverse values to bring accounts at cost) |
| Stock Mis. App……… a/c .Dr. To trading a/c (recognize loss of stock in the trading account) |
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| Profit and loss a/c…. Dr. To Fraudster a/c |
FAQs:
Q1: why are you not adjusting the stock in hand when the fraud has been detected and the actual stock in hand is less than the one disclosed in the books?
A1: you must view things globally; physical stock in less in my hands but rest is held by the fraudster in his account, which is actually mine, hence when we take view in toto, the stock is full as disclosed in the books
Q2: we can also adjust things in a different manner like this:
Adjust the stock to physical value in hand and debit the fraudster. This way there will be no need to recognize the sale.
A2: your point will be valid only when the stock is stolen and the thief is not traceable, then we adjust the stock and recognize the loss. In this case the amount has to be recovered from the fraudster who is well recognized. Thus until and unless we do not raise the full amount of claim against him in our books we cannot fight a case against him.
5. Timing of reporting- AS 4 (revised) ‘Contingencies and Events occurring after the balance sheet date.
Consider the following examples for understanding the concept:
I) In X Co. Ltd., theft of cash of Rs.5 lakh by the cashier in January, 2010 was detected only in May, 2010. The accounts of the company were not yet approved by the Board of Directors of the company. Whether the theft of cash has to be adjusted in the accounts of the company for the year ended 31.3.2010. Decide.
Ans: AS per paragraph 13 of AS 4 (revised) ‘Contingencies and Events occurring after the Balance Sheet Date; an event occurring after the balance sheet date may require adjustment
to the reported values of assets, liabilities, expenses or incomes. If a fraud of the accounting period is detected after the balance sheet date but before approval of the financial statements, it is necessary to recognize the loss amounting Rs. 5, 00,000 and adjust the accounts of the company for the year ended 31st March, 2010.
HEAVY LOSS DUE TO THEFT OF GOODS AND STOCK WAS NOT INSURED BUT PROCEDURE FOR TRACING THE ROBBERS IS CONTINUE THEN WHAT IS TRETMENT OF THAT TRANCTION IN ACCOUNT AND AUDIT