Insurance Claims for Loss of Stock and Loss of Profit: Notes | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


 
LEARNING OUTCOMES 
*   
 
 
INSURANCE CLAIMS FOR 
LOSS OF STOCK AND 
LOSS OF PROFIT 
 
 
 
After studying this chapter, you will be able to – 
? Understand the significance of Claim for loss of stock and loss 
of profit. 
? Comprehend with the terms Loss of profit; Standing Charges 
and Increased cost of working. 
? Compute the amount of claim for loss of stock and loss of 
profit 
 
 
 
 
 
 
 
10 
CHAPTER 
Page 2


 
LEARNING OUTCOMES 
*   
 
 
INSURANCE CLAIMS FOR 
LOSS OF STOCK AND 
LOSS OF PROFIT 
 
 
 
After studying this chapter, you will be able to – 
? Understand the significance of Claim for loss of stock and loss 
of profit. 
? Comprehend with the terms Loss of profit; Standing Charges 
and Increased cost of working. 
? Compute the amount of claim for loss of stock and loss of 
profit 
 
 
 
 
 
 
 
10 
CHAPTER 
 
 
10.2 
 
ACCOUNTING 
 
  
 
 
 
  
Significance of 
insurance policy
Loss due to fire, 
flood, theft, 
earthquake etc
Claim for loss of 
stock and Loss of 
profit 
Important terms
Amount of claim for loss 
of stock in case of
Total Loss (Goods fully destroyed)
Actual loss (provided the goods are 
fully insured)
Partial Loss (Goods partially 
destroyed)
Actual loss (subject to goods being
fully insured and whether average
clause is applicable or not)
Insurance for 
Loss of Profit
limited to loss of gross profit 
(i)Reduction in 
turnover, and
(ii) Increase in the 
cost of working
 
Page 3


 
LEARNING OUTCOMES 
*   
 
 
INSURANCE CLAIMS FOR 
LOSS OF STOCK AND 
LOSS OF PROFIT 
 
 
 
After studying this chapter, you will be able to – 
? Understand the significance of Claim for loss of stock and loss 
of profit. 
? Comprehend with the terms Loss of profit; Standing Charges 
and Increased cost of working. 
? Compute the amount of claim for loss of stock and loss of 
profit 
 
 
 
 
 
 
 
10 
CHAPTER 
 
 
10.2 
 
ACCOUNTING 
 
  
 
 
 
  
Significance of 
insurance policy
Loss due to fire, 
flood, theft, 
earthquake etc
Claim for loss of 
stock and Loss of 
profit 
Important terms
Amount of claim for loss 
of stock in case of
Total Loss (Goods fully destroyed)
Actual loss (provided the goods are 
fully insured)
Partial Loss (Goods partially 
destroyed)
Actual loss (subject to goods being
fully insured and whether average
clause is applicable or not)
Insurance for 
Loss of Profit
limited to loss of gross profit 
(i)Reduction in 
turnover, and
(ii) Increase in the 
cost of working
 
 
 
10.3 
 
INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS … 
OF PROFIT 
IMPORTANT TERMS  
Claim for Loss of 
Profit 
The Loss of Profit Policy normally covers the following items: 
(1) Loss of net profit, and 
(2) Any increased cost of working 
Gross Profit Net profit +Insured Standing charges   
OR 
Insured Standing charges – [Net Trading Loss (If any) X Insured 
Standing charges/All standing charges of business] 
Net Profit The net trading profit (exclusive of all capital receipts and accretion 
and all outlay properly chargeable to capital) resulting from the 
business of the Insured at the premises after due provision has 
been made for all standing and other charges including 
depreciation. 
Insurable 
Standing 
Charges 
Interest on Debentures, Mortgage Loans and Bank Overdrafts, 
Rent, Rates and Taxes (other than taxes which form part of net 
profit) Salaries of Permanent Staff and Wages to Skilled 
Employees, Boarding and Lodging of resident Directors and/or 
Manager, Directors’ Fees, Unspecified Standing Charges. 
Rate of Gross 
Profit 
The rate of Gross Profit earned on turnover during the financial 
year immediately before the date of damage plus / minus 
adjustment for current year changes in price level.  
Annual 
Turnover  
The turnover during the twelve months immediately preceding 
to the date of damage. 
Standard 
Turnover 
The turnover of the period in corresponding previous year from 
the year in which damage occurred, that corresponds with the 
Indemnity Period. 
Indemnity 
Period 
The period beginning with the occurrence of the damage and 
ending not later than twelve months. Thus, it is a period during 
which business is disturbed due to fire and it is not greater 
than 12 months. 
Adjusted Annual 
Turnover 
Annual Turnover adjusted with (+/-) Trend 
Actual Turnover Turnover during dislocation / indemnity period 
Page 4


 
LEARNING OUTCOMES 
*   
 
 
INSURANCE CLAIMS FOR 
LOSS OF STOCK AND 
LOSS OF PROFIT 
 
 
 
After studying this chapter, you will be able to – 
? Understand the significance of Claim for loss of stock and loss 
of profit. 
? Comprehend with the terms Loss of profit; Standing Charges 
and Increased cost of working. 
? Compute the amount of claim for loss of stock and loss of 
profit 
 
 
 
 
 
 
 
10 
CHAPTER 
 
 
10.2 
 
ACCOUNTING 
 
  
 
 
 
  
Significance of 
insurance policy
Loss due to fire, 
flood, theft, 
earthquake etc
Claim for loss of 
stock and Loss of 
profit 
Important terms
Amount of claim for loss 
of stock in case of
Total Loss (Goods fully destroyed)
Actual loss (provided the goods are 
fully insured)
Partial Loss (Goods partially 
destroyed)
Actual loss (subject to goods being
fully insured and whether average
clause is applicable or not)
Insurance for 
Loss of Profit
limited to loss of gross profit 
(i)Reduction in 
turnover, and
(ii) Increase in the 
cost of working
 
 
 
10.3 
 
INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS … 
OF PROFIT 
IMPORTANT TERMS  
Claim for Loss of 
Profit 
The Loss of Profit Policy normally covers the following items: 
(1) Loss of net profit, and 
(2) Any increased cost of working 
Gross Profit Net profit +Insured Standing charges   
OR 
Insured Standing charges – [Net Trading Loss (If any) X Insured 
Standing charges/All standing charges of business] 
Net Profit The net trading profit (exclusive of all capital receipts and accretion 
and all outlay properly chargeable to capital) resulting from the 
business of the Insured at the premises after due provision has 
been made for all standing and other charges including 
depreciation. 
Insurable 
Standing 
Charges 
Interest on Debentures, Mortgage Loans and Bank Overdrafts, 
Rent, Rates and Taxes (other than taxes which form part of net 
profit) Salaries of Permanent Staff and Wages to Skilled 
Employees, Boarding and Lodging of resident Directors and/or 
Manager, Directors’ Fees, Unspecified Standing Charges. 
Rate of Gross 
Profit 
The rate of Gross Profit earned on turnover during the financial 
year immediately before the date of damage plus / minus 
adjustment for current year changes in price level.  
Annual 
Turnover  
The turnover during the twelve months immediately preceding 
to the date of damage. 
Standard 
Turnover 
The turnover of the period in corresponding previous year from 
the year in which damage occurred, that corresponds with the 
Indemnity Period. 
Indemnity 
Period 
The period beginning with the occurrence of the damage and 
ending not later than twelve months. Thus, it is a period during 
which business is disturbed due to fire and it is not greater 
than 12 months. 
Adjusted Annual 
Turnover 
Annual Turnover adjusted with (+/-) Trend 
Actual Turnover Turnover during dislocation / indemnity period 
 
 
10.4 
 
ACCOUNTING 
Adjusted 
Standard 
Turnover 
Standard Turnover (+/-) Trend (if any) which would be sales in 
the indemnity period had there been no fire. 
Fire Fighting 
Expenses 
Expenses incurred to avoid the damages to the business due to 
fire. For Example: Fire Brigade Expenses / Water Tankers’ 
Charges 
Trend It is an indication of Sales pattern of an organization over a 
specific time period. It will help in estimation of future 
expected sales. 
 1. INTRODUCTION 
Business enterprises get insured against the loss of stock on the happening of 
certain events such as fire, flood, theft, earthquake etc. Insurance being a contract 
of indemnity, the claim for loss is restricted to the actual loss of assets. Sometimes 
an enterprise also gets itself insured against consequential loss of profit due to 
decreased turnover, increased expenses etc. 
If loss consequential to the loss of stock is also insured, the policy is known as loss 
of profit or consequential loss policy. 
Insurance claim can be studied under two parts as under:- 
? Claim for loss of stock 
? Claim for loss of profit 
 2. MEANING OF FIRE 
For purposes of insurance, fire means: 
1. Fire (whether resulting from explosion or otherwise) not occasioned or 
happening through: 
(a) Its own spontaneous fomentation or heating or its undergoing any 
process involving the application of heat; 
(b) Earthquake, subterraneous fire, riot, civil commotion, war, invasion act 
of foreign enemy, hostilities (whether war be declared or not), civil war, 
rebellion, revolution, insurrection, military or usurped power. 
2. Lightning. 
Page 5


 
LEARNING OUTCOMES 
*   
 
 
INSURANCE CLAIMS FOR 
LOSS OF STOCK AND 
LOSS OF PROFIT 
 
 
 
After studying this chapter, you will be able to – 
? Understand the significance of Claim for loss of stock and loss 
of profit. 
? Comprehend with the terms Loss of profit; Standing Charges 
and Increased cost of working. 
? Compute the amount of claim for loss of stock and loss of 
profit 
 
 
 
 
 
 
 
10 
CHAPTER 
 
 
10.2 
 
ACCOUNTING 
 
  
 
 
 
  
Significance of 
insurance policy
Loss due to fire, 
flood, theft, 
earthquake etc
Claim for loss of 
stock and Loss of 
profit 
Important terms
Amount of claim for loss 
of stock in case of
Total Loss (Goods fully destroyed)
Actual loss (provided the goods are 
fully insured)
Partial Loss (Goods partially 
destroyed)
Actual loss (subject to goods being
fully insured and whether average
clause is applicable or not)
Insurance for 
Loss of Profit
limited to loss of gross profit 
(i)Reduction in 
turnover, and
(ii) Increase in the 
cost of working
 
 
 
10.3 
 
INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS … 
OF PROFIT 
IMPORTANT TERMS  
Claim for Loss of 
Profit 
The Loss of Profit Policy normally covers the following items: 
(1) Loss of net profit, and 
(2) Any increased cost of working 
Gross Profit Net profit +Insured Standing charges   
OR 
Insured Standing charges – [Net Trading Loss (If any) X Insured 
Standing charges/All standing charges of business] 
Net Profit The net trading profit (exclusive of all capital receipts and accretion 
and all outlay properly chargeable to capital) resulting from the 
business of the Insured at the premises after due provision has 
been made for all standing and other charges including 
depreciation. 
Insurable 
Standing 
Charges 
Interest on Debentures, Mortgage Loans and Bank Overdrafts, 
Rent, Rates and Taxes (other than taxes which form part of net 
profit) Salaries of Permanent Staff and Wages to Skilled 
Employees, Boarding and Lodging of resident Directors and/or 
Manager, Directors’ Fees, Unspecified Standing Charges. 
Rate of Gross 
Profit 
The rate of Gross Profit earned on turnover during the financial 
year immediately before the date of damage plus / minus 
adjustment for current year changes in price level.  
Annual 
Turnover  
The turnover during the twelve months immediately preceding 
to the date of damage. 
Standard 
Turnover 
The turnover of the period in corresponding previous year from 
the year in which damage occurred, that corresponds with the 
Indemnity Period. 
Indemnity 
Period 
The period beginning with the occurrence of the damage and 
ending not later than twelve months. Thus, it is a period during 
which business is disturbed due to fire and it is not greater 
than 12 months. 
Adjusted Annual 
Turnover 
Annual Turnover adjusted with (+/-) Trend 
Actual Turnover Turnover during dislocation / indemnity period 
 
 
10.4 
 
ACCOUNTING 
Adjusted 
Standard 
Turnover 
Standard Turnover (+/-) Trend (if any) which would be sales in 
the indemnity period had there been no fire. 
Fire Fighting 
Expenses 
Expenses incurred to avoid the damages to the business due to 
fire. For Example: Fire Brigade Expenses / Water Tankers’ 
Charges 
Trend It is an indication of Sales pattern of an organization over a 
specific time period. It will help in estimation of future 
expected sales. 
 1. INTRODUCTION 
Business enterprises get insured against the loss of stock on the happening of 
certain events such as fire, flood, theft, earthquake etc. Insurance being a contract 
of indemnity, the claim for loss is restricted to the actual loss of assets. Sometimes 
an enterprise also gets itself insured against consequential loss of profit due to 
decreased turnover, increased expenses etc. 
If loss consequential to the loss of stock is also insured, the policy is known as loss 
of profit or consequential loss policy. 
Insurance claim can be studied under two parts as under:- 
? Claim for loss of stock 
? Claim for loss of profit 
 2. MEANING OF FIRE 
For purposes of insurance, fire means: 
1. Fire (whether resulting from explosion or otherwise) not occasioned or 
happening through: 
(a) Its own spontaneous fomentation or heating or its undergoing any 
process involving the application of heat; 
(b) Earthquake, subterraneous fire, riot, civil commotion, war, invasion act 
of foreign enemy, hostilities (whether war be declared or not), civil war, 
rebellion, revolution, insurrection, military or usurped power. 
2. Lightning. 
 
 
10.5 
 
INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS … 
OF PROFIT 
3. Explosion, not occasioned or happening through any of the perils specified 
in 1 (a) above. 
(i) of boilers used for domestic purposes only; 
(ii) of any other boilers or economizers on the premises; 
(iii) in a building not being any part of any gas works or gas for domestic 
purposes or used for lighting or heating the building. 
The policy of insurance can be made to cover any of the excepted perils by 
agreement and payment of extra premium, if any. Damage may also be covered if 
caused by storm or tempest, flood, escape of water, impact and breakdown of 
machinery, etc., again by agreement with the insurer. 
Usually, fire policies covering stock or other assets do not cover explosion of boilers 
used for domestic purposes or other boilers or economizers in the premises but 
policies in respect of profit cover such explosions. 
 3. CLAIM FOR LOSS OF STOCK 
Fire insurance being a contract of indemnity, a claim can be lodged only for the 
actual amount of the loss, not exceeding the insured value. In dealing with 
problems requiring determination of the claim the following point must be noted: 
(a) Total Loss: If the goods are totally destroyed, the amount of claim is equal 
to the actual loss, provided the goods are fully insured. However, in case of 
under insurance (i.e. insurable value of stock insured is more than the sum 
insured),the amount of claim is restricted to the policy amount. 
Example:  
Stock on the date of fire   ` 3,00,000 
Stock fully destroyed by fire (no salvage) 
Amount of policy in case (1) ` 4,00,000 and in case (2) ` 2,50,000.  
Here, in case (1), claim can be lodged for actual amount of loss i.e. ` 3,00,000, 
as it is not exceeding the policy value.  But in case (2), i.e. claim amount cannot 
exceed policy amount and it will be for ` 2,50,000. 
(b) Partial Loss: If the goods are partially destroyed, the amount of claim is equal 
to the actual loss provided the goods are fully insured. However, in case of