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Accounting for insurance claims

Accounting for insurance claims. Type of claims. 1. claims for loss of assets including stock 2. claims for loss of profits or consequential loss. Calculation of loss of assets.

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Accounting for insurance claims

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  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

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