best summary notes
It is contract of indemnity it covers two types of contract:
Loss of stock
Loss of profit
Joint policy of stock and profit also allowed.
Stock on the date of fire is required to calculate. For the calculation of stock memorandum trading account will be prepared.
When closing stock is more than amount of policy, apply average clause.
Amount of claim:
Closing stock : loss
Amount of policy : ?
- 4 while preparing trading account, only normal sales will be considered, ignore abnormal sales.
Abnormal sales means goods sold at other than pre-determined price.
Stock should be considered at cost, while applying normal GP rate.
Hence in memorandum trading account stock at net realizable value is deducted.
If goods are sold at abnormal price, cost of such goods will be deducted from opening stock or purchase. Sale of such goods also excluded from sale then GP rate can be applied.
If goods not sold up to date of fire it would be added in stock as per trading account for insurance claim,
Loss of profit:
Due to fire or other natural calamities,
Business will be discontinued and transfer at any other place, such dislocation period will be treated as “indemnity” period.
Profit lost during this period can be recovered.
For the calculation of allowable claim of profit, following steps will be followed
Step 1 period of indemnity :
Policy period or dislocation period which is less.
Step 2 compute adjusted rate of GP:
Net profit of last year +insured standing charges *100
Turnover of last financial year
Adjusted GP= GP + trend (increase or decrease)
Step 3 calculation of short sales :
Turnover of dislocation period of previous year +increase/decrease in turnover- actual turnover for dislocation period
Step 4 GP lost on short sales =
Short sales*adjusted GP (step2* step3)
Step 5 Allowable additional expenses.
Least of below:
1 Actual Expenses
2 Adjusted GP on sales generated by additional expenses.
3 additional exp*GP on adjusted annual turnover
GP on adjusted annual turnover + uninsured standing expenses
Step 6 amount of claim before applying average clause = GP lost on short sales+
Allowable additional expenses –saving in expenses (step3 + step 5 -saving)
Step 7 Apply average clause:
Policy of profit required = GP on adjusted annual turnover
Step 8 amount of claim =
amount of policy*loss of profit
GP on adjusted turnover
Adjusted annual turnover= 12months turnover proceeding the date of fire +increase or decrease in trends.