Insurance Claim:Loss On Stocks Claims – Basic College Accounting

How to compute Loss On Stock Claims

1. Draw up an estimated Trading Account for the period2. The average gross profit % on turnover for the past years will be ascertained and this rate is use to calculate the estimated gross profit on the sales for the period under review.3. The balance on the Trading Account will represent the stock that has been lost.

4. Where books of accounts have been destroyed, customers and suppliers are being circularized to obtain the sales and purchases respectively

5. For opening stock value, this can be obtained from copies of last Balance Sheet available from auditor or Inland Revenue.

6. Any salvaged stock is valued and deduct from the estimated total stock value to give the amount of insurance claim 7. Where the insurance policy has an average clause attached, this average clause will be used to reduce the amount of claim.

Illustrated:

Closing stock = $10,000;

Value of stock salvaged =$2,000; Insurance cover is $6,000;Under the average clause condition, the claimant can only be paid for($10,000-$2,000) x $6,000/$10,000 =$4,800 only

Illustration for Loss Of Stock Claim

Question:On 1 June 2006, the stock of A Limited was destroyed by fire. The books of account showed the following:

	$
Sales for the year to 31/12/2005	200,000
Stock per Balance Sheet @ 31/12/05	20,000
Purchases between 1/1 to 1/6/2006	25,000
Sales between 1/1 to 1/6/2006	50,000
Stock at cost on 1/1/2005	15,000
Purchases for year ended 31/12/2005	165,000

Stock salvaged realized $2,500 and the current gross profit ratio in recent years has been constant.Compute the amount of insurance claim for stock.

Solution:

First construct the Trading Account for year ended 31/12/2005 to ascertain what is the gross profit %.

Trading Account For Year Ended 31/12/2005

	$		$
Opening Stock	15,000	Sales	200,000
Purchases	165,000
	180,000
Closing stock	20,000
Cost of sales	160,000
Gross Profit( balancing figure)	40,000
	200,000		200,000

Therefore, Gross Profit % = $40,000/$200,000=20%

(2) Next, construct the ESTIMATED Trading Account for the five months period ended 31/5/2006 to ascertain what is value of the stock loss by filling in the balancing figure using the GP% of 20% earlier obtained from step (1)

Trading Account For Year Ended 31/12/2005

	$		$
Opening Stock	20,000	Sales	50,000
Purchases	25,000
	45,000
Closing stock (???)	5,000
Cost of sales	40,000
Gross Profit ( per step 1 =20% x$50,000 (sales))	10,000
	50,000		50,000

(3) Finally, compute the insurance claim:

From item 2, estimated closing stock = $ 5,000

Less: Salvage value of stock realized = ($2,500) Therefore Insurance Claim = $2,500

Accounting Entries for Insurance Claims:

	DR	CR
Insurance Claim Account	XXX
Trading A/c with computed value of stock lost		XXX

Insurance Claim Account	XXX
Bank Account with expenses in respect of the claim and of repairing damaged stock		XXX

Bank Account	XXX
Insurance Claim Account with proceeds of claims received		XXX

Profit and Loss Account	XXX
Insurance Claim Account with loss on insurance claim (if any)		XXX

Leave a Comment Cancel reply