# Insurance Claim:Loss On Stocks Claims

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

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