Insurance Claims

Technical Terms used in Insurance parlance

1. Insurer
2. Insured
3. Insurance premium
4. Fire Insurance and Accident Insurance
5. Loss of Stock / Loss of Profit due to fire.
Notes: Only loss of stock due to fire will be included
in Financial Accounting-2 for B.Com-2 Semester
of Bangalore University.
 Procedure involved to calculate the amount which a business
organization can claim from the insurance company:

STEP 1 : Preparation of previous years Trading Account

STEP 2: Calculation of rate of gross profit on sales from
previous year’s trading account.
STEP 3 : Preparation of Memorandum Trading Account
for the year in which the fire broke out.
STEP 4: Ascertainment of actual amount of loss.
STEP 5 : Ascertainment of claim amount.
 Points to be noted for Step 1:
1. Previous year’s trading account is prepared in
order to calculate the rate of gross profit on
sales. Hence, if that rate is mentioned in the
question, then you don’t need to prepare
previous year’s trading account.
2. Remember that the rate of gross profit is always
calculated on sales. Hence, if the rate of Gross
profit on cost is mentioned, calculate the rate
of G.P. on sales.
 Points to be noted in Step 3:
• Memorandum Trading account is called so,
because its not prepared for the entire year, i.e.
its time period would be from first day of current
financial year upto the date of fire.
• The balancing figure in this memorandum trading
account is called as ‘stock on the date of fire’
 Step 4
• Actual loss of stock due to fire should be
calculated using the following formula:
Amount in Rs
Stock on the date of fire XX
Less: Stock salvaged X
Add: Expenses incurred in
extinguishing the fire. X
Actual loss XX
 Step 5
Ascertainment of claim amount
Amount of claim =
Policy Amount_____ X Actual Loss
Stock on date of fire

NOTE: In the absence of any information regarding

policy amount in the question, actual loss of
stock due to fire itself would be the claim
amount.