Accounting for insurance claims

1. Accounting for insurance claims

2. Type of claims • 1. claims for loss of assets including stock • 2. claims for loss of profits or consequential loss.

3. 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

4. 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.

5. 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

6. 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.

7. 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.

8. Memorandum trading account

9. Claim for the loss of stock • It is claimed by preparing statement of claim for loss of stock.

10. Statement of claim for loss of stock

11. 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

12. 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.

13. 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.

14. 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.

15. 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.

16. Short sales • It means the loss of sales due to dislocation of business due to fire. • Short sales = standard sales – actual sales(indemnity period)

17. Steps involved in the computation of claim for loss of profits

18. 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

19. 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

20. Formula of admissible increased additional expenses • Increased cost of working *net profit +insured standing charges • -------------------------------------------------------------- • net profit +standing charges

21. Statement of claim

22. Average clause • Net claim = • Gross claim policy amount • gross profit on annual sales