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Insurance Claim refused

19 June 2020

Respected Sir,

in Feb 19 huge stock burnt in fire approximate value of Rs. 1286000/- The same was covered under insurance. in the books of account we have shown outstanding Rs. 1286000/- in the name of insurance company but now insurance company refused the claim due to some issues. please advise how to adjust outstanding Value in the books of account.

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3 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 19 June 2020

Debtors, insurance receivables a/c 12860000₹

O/S claim a/c 12860000₹- Income statement Income side

this must be your entry created anticipating recovery of that amount through insurance claim. Now that the claim is rejected

O/S claim a/c 12860000₹- Income statement expensed as loss

To Debtors, insurance receivables a/c

This will be the adjustment according to me,

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 20 June 2020

@ Naveen (forgot to mention the whole entries)

i think the second entry will not be necessary because you must have already written off inventory. So

Loss on damage

To Inventory

and reduce COS in calculations. This won’t be necessary because the final inventory in COS is already adjusted in balance sheet.

Then

Claim receivables

To insurance claim

once it is rejected, reverse the entry to nullify previous income entry with expense entry. Then what else...ok...these are the entries required for the moment.

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 20 June 2020

Let us take an example:

purchases 10,000

Sales 50,000

Finished goods 20,000 (10,000 purchased inventory and 10,000 to finish production)

Other expenses=20,000

Cos=20,000

Grossprofit= 30,000₹

Net profit= 10,000₹

if 5,000 goods are damaged, gross profit will increase by 35,000₹ And net profit by 15,000 due to inventory write off in the balance sheet.

so the loss should be shown as 5,000₹ as expenses and the gross profit will be 30,000₹ with Net profit as 10,000 back again.

Sales 50,000

-COS (20000-5000 damage)

gross profit 35,000₹

-Other expenses 20,000

- Damage 5,000

Net Profit= 10,000.

What is the difference? There is no loss recognised here. So adjustments to COS is not required to get the real loss on net income.

This makes it

Sales 50,000

- Cos20,000

Gross profit= 30,000

- other expenses 20,000

-damage 5,000

net profit= 5,000₹

So there is a method here which defines cost of inventory as purchase cost+conversion cost= 20,000₹ above. So subtract purchases from it and COS = 10,000. Simple.

sales 50,000

Cos (10,000-5000)

gross profit= 45,000₹

Other expenses (20,000)

Net profit 25,000

In this method COS simply adjusts for damage loss.

Finally we have to understand the formulas for cogs. You might be confused as to why should Purchases be cancelled against cost of inventory? Think about it yourself and you will understand it mathematically yourself.

Have a nice week end.