ANMOL GUPTAANMOL GUPTA B.COM -1B.COM -1 2146/132146/13

Every business unit has to maintain the stock of Every business unit has to maintain the stock of goods to meet the requirementgoods to meet the requirement..

The stock of goods kept in the business The stock of goods kept in the business premises subject to risk of loss by fire.premises subject to risk of loss by fire.

For protecting itself against such loss, A For protecting itself against such loss, A business unit takes fire insurance policy.business unit takes fire insurance policy.

It covers loss of stock by fire and undertakes to It covers loss of stock by fire and undertakes to compensate the business unit for loss of stock compensate the business unit for loss of stock

To lodge the claim for the loss of stock by fire, following points To lodge the claim for the loss of stock by fire, following points are considaredare considared :- :-

Percentage of gross profit on salesPercentage of gross profit on sales

Prepare memorandom trading account of the current year upto Prepare memorandom trading account of the current year upto the date of fire on the basis of opening stock, purchases and the date of fire on the basis of opening stock, purchases and sales from the beginning of the year upto the date of fire and sales from the beginning of the year upto the date of fire and estimated gross profit on the basis of last year G.P .estimated gross profit on the basis of last year G.P .

The balancing figure in memorandom trading account will be the The balancing figure in memorandom trading account will be the estimated value of stock in hand on the date of fire .estimated value of stock in hand on the date of fire .

1.1. The third step is to deduct the value of stock The third step is to deduct the value of stock salvaged from the value of stock in hand on salvaged from the value of stock in hand on the date of fire .the date of fire .

The resultant figure is the amount of claim for The resultant figure is the amount of claim for the loss of stock to be lodged with the the loss of stock to be lodged with the insurance company.insurance company.

A fire insurance policy usually includes an average clause to A fire insurance policy usually includes an average clause to

discourage the under insurance of stock or any asset.discourage the under insurance of stock or any asset.

The effect of this clause is that if the value of stock orThe effect of this clause is that if the value of stock or any asset insured on the date of fire is more than the any asset insured on the date of fire is more than the amount of policy taken, the full value of stock or any assetamount of policy taken, the full value of stock or any asset destroyed does not become payable to the insured but thedestroyed does not become payable to the insured but the insurance company pays the proportion of the loss which theinsurance company pays the proportion of the loss which the amount of policy taken bears to the total value of stock or anyamount of policy taken bears to the total value of stock or any asset in hand on the date of fire.asset in hand on the date of fire.

value of policyvalue of policy

Value of goods lostValue of goods lost value of closingvalue of closing stockstock

The above mentioned formula is The above mentioned formula is useful in estimating the actual claimuseful in estimating the actual claim. .

ILLUSTRATION-1ILLUSTRATION-1

A fire occurred in the premises of A&CO. on 25A fire occurred in the premises of A&CO. on 25 thth April April 2012. From the following particulars ascertain the 2012. From the following particulars ascertain the amount of claim to be lodged in case of loss of stock amount of claim to be lodged in case of loss of stock which was insured .which was insured .

Stock on 1-1-2012 - 250000Stock on 1-1-2012 - 250000 Purchases upto the date of fire – 10,00,000Purchases upto the date of fire – 10,00,000 Wages – 2,00,000Wages – 2,00,000 Production expenses – 1,00,000Production expenses – 1,00,000 Sales upto the date of fire – 15,00,000Sales upto the date of fire – 15,00,000 Stock salvaged – 57500Stock salvaged – 57500 Gross profit ratio – 15%Gross profit ratio – 15%

MEMORANDOM TRADING ACCOUNT MEMORANDOM TRADING ACCOUNT

PARTICULARSPARTICULARS AMT.AMT. PARTICULARS AMT.PARTICULARS AMT. To opening - 250000 By sales – 15,00,000 To opening - 250000 By sales – 15,00,000

stock stock To purchases – 10,00,000 By closing stock - 275000To purchases – 10,00,000 By closing stock - 275000To wages - 2,00,000 (balancing figure)To wages - 2,00,000 (balancing figure)To production – 1,00,000To production – 1,00,000To gross profit – 2,25000To gross profit – 2,25000 1775000 17750001775000 1775000

stock on date of fire = 2,75000stock on date of fire = 2,75000 - stock salvaged = 57500- stock salvaged = 57500 Claim to be lodged = 2,17,500 Claim to be lodged = 2,17,500

stock on date of fire = 2,75000stock on date of fire = 2,75000 - stock salvaged = 57500- stock salvaged = 57500 Claim to be lodged = 2,17,500 Claim to be lodged = 2,17,500