e CORPORATE ACCOUNTING I MODULE V INSURANCE CLAIMS 2 MARK QUESTIONS What do you mean by insurance claim? The claim lodged by the business to the insurance company on happening the event of specific loss is called insurance claim. What are the types of insurance claims? Loss of assets including stock Loss of profit as a consequent to fire What do you mean by loss of stock policy? ‘When the fixed assets are lost by fire, there is a possibility to occur huge loss for the business. Loss of stock policy is the policy for compensating the loss arising due to the loss arising for fixed assets due to fire. . What do you mean by loss of profit policy? A loss of profit policy is a policy attached to the fire insurance policy, where the insured will be compensated also for loss in profit due to interruption in business activities due to fire in addition to loss of stock. What is average clause? When a business takes an insurance policy, the value of which is less than the value of the average stock in the business, it is known as “Under insurance”. Generally fire insurance policies contain an Average Clause to discourage under-insurance. Average clause is a provision in the insurance contract in which the insurance claim due on loss of stock is reduced to the proportion that the policy value bears to the value of stock on the date of fire. 6. What is indemnity period? © scanned with OKEN ScannerIt is the period beginning with the occurrence of the damage and ending not later than 12 months after the occurrence of damage. 7. What is annual sales? It is the turn over during the twelve months immediately preceding the date of damage of fire. 8. What is short sales? Short sales is the shortage in sales during the indemnity period because of dislocation in business due to fire. It is the difference between standard sales and actual sales of dislocated (indemnity) period. 10.What is standard turn- over? It is the turn over during that period in the twelve months immediately before the date of damage which corresponds with the indemnity period. 11. What is insured standing charges? The insured standing charges are those standing charges specified in the policy which the insured desires to recover in the case of an accident. 12. What is memorandum Trading Account? Memorandum Trading Account is an account prepared to find out the value of stock of goods as on the date of fire as the balancing figure of the account. Gross profit may be ascertained on the basis of the percentage of gross profits on sales and the balance in the account will be the value of stock as on the date of fire. 5 MARK QUESTIONS 1. What is memorandum trading account? Why it is prepared? Memorandum Trading Account is an account prepared to find out the value of stock of goods as on the date of fire as the balancing figure of the account. Gross profit may be ascertained on the basis of the percentage of © scanned with OKEN Scannergross profits on sales and the balance in the account will be the value of stock as on the date of fire. Memorandum Trading Account Particulars Rs. Particulars Rs. To Opening Stock XXX By Sales XXX To Purchases XXX Less : Return XXX XXX Less: Return XXX XXX By Closing Stock XXX To Carriage inwards XXX To Wages XXX To Direct expenses XXX To Gross Profit (% on sales) XXX, XXxx XXXX 2. What is average clause? Explain with an example. When a business takes an insurance policy, the value of which is less than the value of the average stock in the business, it is known as “Under insurance”. Generally fire insurance policies contain an Average Clause to discourage under-insurance. Average clause is a provision in the insurance contract in which the insurance claim due on loss of stock is reduced to the proportion that the policy value bears to the value of stock on the date of fire. X took out a fire insurance policy containing an average clause covering his stock for Rs.40,000. On the date of fire the value of stock was Rs.50,000. The loss was assessed at Rs.30,000. In this case, the value of stock on the date of fire was more than the policy value. Therefore, the average clause is applicable. X can recover from the insurance company. © scanned with OKEN Scanner3. Claims to be lodged = Loss of Stock x Policy Value Value of stock on the date of fire Explain the various steps in ascertaining the loss of stock by fire. a. Ascertaining the value of stock at the time of fire The value of stock can be ascertained by preparing a memorandum trading account for the period. Memorandum Trading Account is an account prepared to find out the value of stock of goods as on the date of fire as the balancing figure of the account. Gross profit may be ascertained on the basis of the percentage of gross profit on sales and the balance in the account will be the value of stock on the date of fire. b. Ascertainment of net loss of stock after deducting the salvage value of stock Salvage value if any, has to be deducted from the estimated value of stock on the date of fire for getting net loss. c. Application of average clause When a business takes an insurance policy, the value of which is less than the value of the average stock in the business, it is known as “Under insurance”. Generally fire insurance policies contain an Average Clause to discourage under-insurance. Average clause is a provision in the insurance contract in which the insurance claim due on loss of stock is reduced to the proportion that the policy value bears to the value of stock on the date of fire. © scanned with OKEN Scanner