Commerce

Lecture No.- 01
- For CA Intermediate

Subject Name
Accounts

• Insurance Claims

Nitin Goel
 INSURANCE CLAIMS

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
 The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
Question
A fire engulfed the premises of a business of M/s X Ltd. in the morning, of 1st October, 2019. The entire
stock was destroyed except, stock salvaged of Rs. 50,000. Insurance Policy was for Rs. 3,00,000 with
average clause. The following information was obtained from the records saved for the period from 1st
April to 30th September, 2019:
Sales 27,75,000
Purchases (including Purchase of Machinery 1,00,000) 20,30,000
Carriage inward 35,000
Sales value of drawings 20,000
Cost of goods distributed as free sample 10,000
Wages (including installation of Machinery 10,000) 50,000
Cost of goods sent to Consignee on 20th September 2019, 30,000
lying unsold with them
Stock in hand on 31st March, 2019 (lower than 10% cost) 3,15,000
Additional Information:
(1) Sales upto 30th September, 2019, includes Rs. 75,000 for which goods had not been dispatched.
(2) On 1st June, 2019, goods worth Rs. 1,98,000 sold to Hari on approval basis which was included in
sales but no approval has been received in respect of 2/3rd of the goods sold to him till 30th
September, 2019.
(3) Purchases upto 30th September, 2019 did not include Rs. 1,00,000 for which purchase invoices had
not been received from suppliers, though goods have been received in godown.
(4) Past records show the gross profit rate of 25% on sales.
You are required to prepare the statement of claim for loss of stock for submission to the Insurance
Company
Solution
Memorandum Trading A/c
(1.4.19 to 30.9.19)
Particulars (Rs.) Particulars (Rs.)
To Opening stock 3,50,000 By Sales 25,68,000
(3,15,000*100/90)
To Purchases 20,05,000 By Goods with customers* 99,000
(for approval) (W.N.1)
To Wages 40,000 By Goods with consignee 30,000
(50,000 – 10,000)
To Carriage inward 35,000 By Closing stock (bal. fig.) 3,75,000
To Gross profit 6,42,000
(Rs. 25,68,000 x 25%)
30,72,000 30,72,000

Computation of claim for loss of stock

Rs.
Stock on the date of fire (i.e. on 1.10.2019) 3,75,000
Less: Stock salvaged (50,000)
Stock destroyed by fire (Loss of stock) 3,25,000

Insurance claim
Average clause is applicable as insurance policy amount (Rs. 3,00,000) is less than the value of closing
stock ie. Rs. 3,75,000
Claim = Loss of Stock x Policy Amount
Stock on date of fire
= 3,25,000 x 3,00,000
3,75,000
= 2,60,000
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
Working Notes:
1. Computation of Purchases
Rs.
Purchases (Given) 20,30,000
Less: Purchase of Machinery (1,00,000)
Less: Cost of Drawings (20,000-25%) (15,000)
Less: Cost of Goods distributed as samples (10,000)
Add: Goods physically received in godown 1,00,000
20,05,000
2. Calculation of goods with customers
Since no approval for sale has been received for the goods of Rs. 1,32,000 (i.e. 2/3 of 1,98,000)
hence, these should be valued at cost i.e. Rs. 1,32,000 – 25% of Rs. 1,32,000 =Rs. 99,000.
3. Calculation of actual sales
Total sales – Goods not dispatched - Sale of goods on approval (2/3rd) =
Sales (Rs. 27,75,000 – 75,000 – Rs.1,32,000) = Rs. 25,68,000

ABNORMAL STOCK/ ABNORMAL ITEM

Trading Account [Last Year]
Particulars Amount Particulars Amount
To Opening Stock xx By Sales (net of Returns) xx
To Purchases By Closing Stock
(net of Returns) xx Actual Value shown in books xx
Add: Amount written off xx xx
To Gross Profit xx
(Bal. Figure)
XX XX

Memorandum Trading A/c

Particulars Normal Abnormal Total Particulars Normal Abnormal Total
To Opening Stock By Sales
To Purchases By Loss on sale
To Direct By Loss on
Expenses revaluation
To Gross Profit By Closing Stock
(% of Normal sales) (Bal. figure)

Treatment of Abnormal Items of Stock

1) If any abnormal items of stock is given in question, then amount which has been written off from this
stock shall be 1st of all added in closing stock while preparing last year Trading A/c.
2) Total value of this closing stock shall be written in Total column in Memo Trading A/c, the original
cost of abnormal items shall be written in abnormal column & the balance stock shall be written in
normal column.
3) For loss of stock on date of fire, closing stock includes both normal & abnormal stocks.
4) Unless otherwise stated, estimated value of stock on date of fire consists of book value of normal items
& book value of abnormal items. Sometimes specific valuation of abnormal items is given for purpose
of claim, then instead of book value such valuation should be taken.

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
Question
A fire occurred in the premises of M/s. Z & Co. on 30-06-2019. From the salvaged accounting records,
the following particulars were ascertained
Stock at cost as on 01-04-2018 1,20,000
Stock valued as on 31-03-2019 1,30,000
Purchases less return during 2018-19 5,25,000
Sales less return during 2018-19 6,00,000
Purchases from 01-04-2019 to 30-06-2019 97,000
Purchases upto 30-06-2019 did not include Rs. 35,000 for which purchase invoices
had not been received from suppliers, though goods have been received in godown.
Sales from 1.4.2019 to 30.6.2019 1,66,000
In valuing the stock for the Balance Sheet at 31st March, 2019, Rs. 5,000 had been written off on certain
stock which was a poor selling line having the cost of Rs. 8,000. A portion of these goods were sold in
May, 2019 at a loss of Rs. 1,000 on original cost of Rs. 7,000. The remainder of the stock was now
estimated to be worth its original cost. Subject to that exception, gross profit had remained at a uniform
rate throughout the year.
The value of the salvaged stock was Rs. 10,000. M/s. Z & Co. had insured their stock for Rs. 1,00,000
subject to average clause. Compute the amount of claim to be lodged to the insurance company.

Solution
Trading A/c
(1.4.18 to 31.03.19)
Particulars Amount Particulars Amount
To Opening Stock 1,20,000 By Sales 6,00,000
To Purchases 5,25,000 By Closing Stock 1,35,000
(1,30,000 + 5,000)
To G.P (Bal. figure) 90,000
7,35,000 7,35,000
GP Ratio for 18-19 = 90,000 x 100 = 15%
6,00,000
Memorandum Trading A/c
(1.4.19 to 30.6.19)
Particulars Normal Abnormal Total Particulars Normal Abnormal Total
To Opening Stock 1,27,000 8,000 1,35,000 By Sales 1,60,000 6,000 1,66,000
T o Purchases 1,32,000 1,32,000 By Loss 1,000 1,000
(97,000+35,000)
To Gross Profit 24,000 24,000 By Closing Stock 1,23,000 1,000 1,24,000
(15% of 1,60,000) (Bal. figure)
2,83,000 8,000 2,91,000 2,83,000 8,000 2,91,000

Computation of Insurance Claim

Stock on the date of fire 1,24,000
Less: Stock salvaged (10,000)
Loss of stock 1,14,000
Claim subject to average clause:
Insurance Claim = 1,14,000 x 1,00,000 = 91,935
1,24,000

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
 LOSS OF PROFIT
STEPS
Step 1: Calculate GP Ratio of Last/Previous Year:
It is calculated as per Insurance Rules & has nothing to do with GP ratios in accounts.
a) GP (%) = NP + Insured standing charges X 100
Sales

b) Effective GP(%)=
GP (%) xxx
+ Increase in Trend xxx
- Decrease in Trend (xxx)
Effective GP(%) xxx

Step 2: Calculate Short Sales

Turnover in corresponding period of Previous Year/ Standard Turnover xxx
[After adjusting trend, if any]
Less: Actual Turnover in dislocated/effected period (xxx)
Short Sales xxx

Step 3: Loss of Profit = Short Sales X GP ( %)

i.e. (Step 2 X Step 1)

Step 4:
a) Adjusted Annual turnover= Turnover during 12 months immediately the preceding date of fire
[After adjusting trend, if any]

b) Insurable Amount = Adjusted Annual Turnover X GP (%)

Step 5: Additional Expenses (Lower of the following to be considered)

a) Actual Additional expenses
b) Actual Additional Expenses X Insurable Amount .
Insurable Amount +Uninsured standing charges
c) Turnover achieved due to additional expenses X GP Ratio
(If not given then take Turnover in dislocated period)

Step 6: Calculate Total Loss

Loss of Profit (Step 3) xx
Add: Additional Expenses (Step 5) xx
Less: Saving in insured standing charges (xx)
Total Loss xx

Step 7: Applicability of Average Clause

It is applied if Insurable Amount > Insured Amount

Claim to be Lodged= Total Loss (Step 6) X Insured Amount

Insurable Amount
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
Question
The premises of a company were partly destroyed by the fire which took place on 31st July, 2021 and as a
result of which the business was disorganized from 31st July to 30th November, 2021. Accounts are closed
on 31st March, every year. The company is insured under a loss of profit policy for Rs.7,50,000. The
period of indemnity specified in the policy is 6 months. From the following information you are required
to compute the amount of claim under the Loss of Profits policy:
Particulars Rs.
Turnover for the year 2020-21 40,00,000
Net profit for the year 2020-21 2,40,000
Insured standing charges 4,80,000
Uninsured standing charges 80,000
Turnover during the period of dislocation, i.e., from 1.8.2021 to 8,00,000
30.11.2021
Standard turnover for the corresponding period in the preceding year, i.e., 20,00,000
from 1.8.2020 to 30.11.2020
Annual turnover for the year immediately preceding the fire i.e., from 44,00,000
1.8.2020 to 31.7.2021
Increased cost of working 1,50,000
Savings in insured standing charges 30,000
Reduction in turnover avoided through increase in working cost 4,00,000
Owing to reasons acceptable to the insurer, the “special circumstances clause” stipulates for:
1. Increase of turnover (Standard and annual) by 10% and
2. Increase of rate of gross profit by 2%.

Solution
1) GP (%) = Net Profit + Insured standing charges X 100
Sales
= 2,40,000+4,80,000 X 100 = 18%
40,00,000

Effective GP Ratio
GP (%) 18%
+ Increase in Trend 2%
Effective GP(%) 20%

2) Short Sales =
Turnover in corresponding period of Previous Year i.e. from 01.08.20 to 30.11.20 20,00,000
Add: Trend in Turnover i.e. 10% 2,00,000
Expected Turnover 22,00,000
Less: Actual Turnover in dislocated period i.e. from 01.08.21 to 30.11.21 (8,00,000)
Short Sales 14,00,000

3) Loss of Profit = Short Sales X GP ( %)

= 14,00,000 X 20% = 2,80,000
4)
a) Adjusted Annual turnover=
Turnover during 12 months immediately the preceding date of fire 44,00,000
i.e. from 01.08.20 to 31.07.21
Add: Trend in Turnover i.e. 10% 4,40,000
Adjusted Annual turnover 48,40,000

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
 b) Insurable Amount = Adjusted Annual Turnover X GP (%)
= 48,40,000 X 20% = 9,68,000
5) Additional Expenses
a) 1,50,000
b) 1,50,000 X . 9,68,000 . = 1,38,550
9,68,000+80,000
c) 4,00,000 X 20% = 80,000
(Turnover achieved due to additional expenditure)
Lower out of above is Rs. 80,000

6) Total Loss
Loss of Profit (Step 3) 2,80,000
Add: Additional Expenses (Step 5) 80,000
Less: Saving in insured standing charges (30,000)
Total Loss 3,30,000

7) Average clause applicable since Insurable Amount > Policy Amount

Claim to be Lodged= 3,30,000 X 7,50,000 = 2,55,682
9,68,000

Question
A fire occurred in the premises of M/s Kirti & Co. on 15th December, 2020. The working remained
disturbed upto 15th March, 2021 as a result of which sales adversely affected. The firm had taken out an
insurance policy with an average clause against consequential losses for ₹ 2,50,000.
Following details are available from the quarterly sales tax return filed/GST return filed:
Sales 2017-18 2018-19 2019-20 2020-21
(₹) (₹) (₹) (₹)
From 1st April to 30th June 3,80,000 3,15,000 4,11,900 3,24,000
From 1st July to 30th September 1,86,000 3,92,000 3,86,000 4,42,000
From 1st October to 31st December 3,86,000 4,00,000 4,62,000 3,50,000
From 1 January to 31 March
st st
2,88,000 3,19,000 3,80,000 2,96,000
Total 12,40,000 14,26,000 16,39,900 14,12,000

A period of 3 months (i.e. from 16-12-2020 to 15-3-2021) has been agreed upon as indemnity period.
Sales from 16-12-2019 to 31-12-2019 68,000
Sales from 16-12-2020 to 31-12-2020 Nil
Sales from 16-03-2020 to 31-03-2020 1,20,000
Sales from 16-03-2021 to 31-03-2021 40,000
Net profit was ₹ 2,50,000 and standing charges (all insured) amounted to ₹ 77,980 for the year ending 31st
March, 2020.
You are required to calculate the loss of profit claim amount.

Solution
Computation of Trend in Turnover:
Year Total Turnover
2017-18 12,40,000
2018-19 14,26,000
2019-20 16,39,900
% change in Turnover = Difference in Turnover X 100
The copyright of these notes is with C.A. Nitin Goel
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 Base Turnover
Year 2017-18 & 2018-19 = 14,26,000 - 12,40,000 X 100 = 15 %
12,40,000
Year 2018-19 & 2019-20 = 16,39,900 - 14,26,000 X 100 = 15 %
14,26,000
Average Rate = 15% + 15% = 15%
2

1) GP (%) = Net Profit + Insured standing charges X 100

Sales
= 2,50,000+77,980 X 100 = 20%
16,39,900
2) Short Sales =
Turnover in corresponding period of Previous Year i.e. from 16.12.19 to 15.03.20 3,28,000
[ 68,000+3,80,000-1,20,000]
Add: Trend in Turnover i.e. 15% 49,200
Expected Turnover 3,77,200
Less: Actual Turnover in dislocated period i.e. from 16.12.20 to 15.03.21 (2,56,000)
[ 0+2,96,000-40,000]
Short Sales 1,21,200

3) Loss of Profit = Short Sales X GP (%)

= 1,21,200 X 20% = 24,240
4)
a) Adjusted Annual turnover=
Turnover during 12 months immediately the preceding date of fire after adjusting trend
Turnover from 16.12.2019 to 31.03.2020 [68,000+3,80,000] 4,48,000
Add: Trend in Turnover i.e. 15% 67,200
5,15,200
Add: Turnover from 01.04.2020 to 15.12.2020 [3,24,000+4,42,000+3,50,000-0] 11,16,000
(Trend not applied since already adjusted with trend)
Total 16,31,200
b) Insurable Amount = Adjusted Annual Turnover X GP (%)
= 16,31,200 X 20% = 3,26,240
5) Additional Expenses = Nil
6) Total Loss
Loss of Profit (Step 3) 24,240
Add: Additional Expenses (Step 5) Nil
Total Loss 24,240
7) Average clause applicable since Insurable Amount > Policy Amount
Claim to be Lodged= 24,240 X 2,50,000 = 18,575
3,26,240

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
Question
A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he could not
decide the policy amount. From the following details, suggest the policy amount:
Turnover in last financial year ₹ 36,00,000
Standing charges in last financial year ₹ 7,20,000
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year.
Increase in turnover expected 25%.
To achieve additional sales, trader has to incur additional expenditure of ₹ 50,000.

Solution
Calculation of Gross Profit
GP (%) = Net Profit + Standing charges X 100
Sales
= 3,60,000+7,20,000 X 100 = 30%
36,00,000

Calculation of policy amount to cover loss of profit

Turnover in the last financial year 36,00,000
Add: 25% increase in turnover 9,00,000
45,00,000
Gross profit on increased turnover (45,00,000 x 30%) 13,50,000
Add: Additional standing charges 50,000
Policy Amount 14,00,000
Therefore, the trader should go in for a loss of profit policy of ₹ 14,00,000.

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.