Computation of Fire insurance claims
22/07/2020Following steps need to be taken to compute insurance claim on the loss of the profit, which is occurred due to dislocation of the business:
Short Sale: Short sale means loss of sale due to the incident of fire and subsequent dislocation of the business. The difference of standard turnover and the actual turnover during the period of indemnity is called short sale. It is illustrated in the following example.
Example
Calculate short sale according to the particulars given below:
| Date of Fire occurs | 01-06-2013 |
| Period of dislocation of business | 4 months |
| Standard Sale | 500,00 |
| Increased trend | 15% |
| Actual Sale | 300,000 |
Solution
Computation of Short Sale
| Standard turnover (Rs. 50,000 + 15%)(A) | 575,000 |
| Less: Actual Sale(B) | 300,000 |
| Short Sale(A-B) | 275,000 |
Saving in Expenses: Saving in expenses due to fire will be deducted from the amount calculated as above.
Average Clause: In case where the value of sum insured is less than the value of policy for which policy have been taken, average clause will be applied as applied for the stock insurance (above).
Accounting Entries
In case of loss of stock
| Insurance company A/c Dr
To Stock Damaged A/c To Stock Destroyed A/c (Being Claim admitted for stock destroyed and stock damaged) |
| Stock destroyed A/c Dr
Stock Damaged A/c Dr To Trading A/c (Being actual cost of stock destroyed and stock damaged to trading account) |
| Bank A/c Dr
To Stock Damaged A/c (Being realization made on sale of damaged Stock) |
| Note: Difference of stock destroyed account and damaged account will be transferred to Profit & Loss account) |
In case of loss of Profit
| Insurance company A/c | Dr |
| To Profit & Loss A/c |
Dr |
| To Profit & Loss Suspense A/c
(Being Loss of profit for next year) |
|
| Bank A/c | Dr |
| To Insurance Company A/c |
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