Accounting for insurance
claims
Type of claims
• 1.
claims for loss of assets including stock
•
claims for loss of profits or
consequential loss.
2.
Calculation of loss of assets
• calculation of loss of assets is simple because
of the value of assets can be find out from
from the accounting records.
• These assets are recorded in accounts at the
time of their acquisition.
• Therefore the claims can be calculated easily
Calculation of claims for loss of
stock
• It is difficult to calculate because –
• It includes many items and purchase are made
at varying rate.
• It become more difficult when stock registers
are not maintained properly and destroyed in
the fire.
Value of stock on the date of fire
• 1. gross profit ratio – gross profit ratio for the
current year (year of fire) is estimated on the
basis of gross profit ratio of preceeding year
•
or
• Average of past few years
Valuation of stock
• 2. information upto the date of fire
• Information related to opening stock,purchases
,sales and direct expenses from closing of last
accounting year upto the date of fire.
• If accounting record are destroyed then collect
information from documentary proofs like
purchase book, sales book, sales bills
,purchase bills, pass books or customer ledger
etc.
Calculation of stock
• Gross profit ratio on the sale of normal items
upto the date of fire is calculated on the basis
of gross profit ratio calculated earlier.
• After this memorandum trading account is
prepared from the first day of memorandum
trading current year to the date of fire.
• Balancing figure of memorandum trading
account is STOCK ON THE DATE OF FIRE.
Memorandum trading account
Particulars
Amount
Particulars
To opening stock
By sales
To purchases
By stock on the date of
fire(Balancing figure)
To direct expenses
To gross profit(% on
sales)
Amount
Claim for the loss of stock
• It is claimed by preparing statement of claim
for loss of stock.
Statement of claim for loss of
stock
PARTICULARS
value of stock on the date of fire
Less salvage value of stock
Amount of claim for loss of stock
AMOUN
T
Average clause
• The main objective of this clause is to encourage
the businessman to have full insurance of their
stock and discourage under insurance.
• Average clause is applicable when the amount of
insurance policy is less then the value of stock on
the date of fire.
• Net claim= loss of stock
policy amount
•
stock on date of
fire
Claim for loss of profits or
consequential losses
• Fire insurance policy only covers loss of stock
but not the loss of profits.
• To cover the loss of profits one has to take a
seperate policy called loss of profit policy or
consequential loss policy with the first one.
Risks covered under loss of profit
policy
• Loss of profits due to dislocation period
• Payment of standing charges under
dislocation period e.g. rent ,salaries, director
fees, depreciation,interest,taxes lighting
charges etc.
• Increased cost of working during the
dislocation period to continue the business
operations smoothly.
Indemnity period
• It starts on the date of fire and ends when the
normality is restore in business.
• The duration does not exceed twelve months.
• Fire insurance policy must be in force at that
time of loss by fire.
Standard sales
• Standard sales are the sales of during that
period in twelve months immediately
preceeding the date of fire which corresponds
with indemnity period.
• For example—date of fire july1, 2012
• Indemnity period—4 months
• Standard sales– from july1, 2011 to october
30, 2011.
Short sales
• It means the loss of sales due to dislocation of
business due to fire.
• Short sales = standard sales – actual
sales(indemnity period)
Steps involved in the computation
of claim for loss of profits
1.CALCULATION OF GROSS PROFIT RATE
Net profit for the previous yeargr
Add insured standing charges of the previous year
Gross profit
GROSS PROFIT RATE= GROSS PROFIT *100
SALES
Calculation of short sales and loss
of gross profit
• Short sales= standard sales –actual sales
during indemnity period
• Loss of gross profit=
•
short sales * gross profit rate
Admissible increased additional
expenses
• Least of the following amount will bal additie
admissible• Actual additional expenses incurred to reduce the
loss of sales
• Gross profit on annual sales becoming possible
due to increased cost of working
• When all standing charges are not covered by the
insurance policy
• Increased cost of working *net profit +insured
standing charges
Formula of admissible increased
additional expenses
• Increased cost of working *net profit +insured
standing charges
• ------------------------------------------------------------•
net profit +standing charges
Statement of claim
Loss of gross profit
Add admissible increased admissible expences
Less saving in insured standing charges
Gross claim
Average clause
• Net claim =
• Gross claim
•
policy amount
gross profit on annual sales