Computation of Fire insurance claims

22/07/2020 2 By indiafreenotes

Following 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.


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


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
To Profit & Loss Suspense A/c

(Being Loss of profit for next year)

Bank A/c Dr
To Insurance Company A/c