Financial Accounting – I CBCAT4T05

Syllabus topics (RTMNU)

• Floatation of Joint Stock Companies and their Capital Structure
• Types of Shares
• Methods of Issue of shares
• Accounting for Issue and Forfeiture of shares
• Reissue of forfeited shares
• Recording relevant entries in the Balance Sheet

Floatation of Joint Stock Companies and their Capital Structure

Floatation means starting (promoting and forming) a company and raising its first capital from the public. A joint stock company is formed under the Companies Act, 2013. It raises money mainly by issuing shares and debentures.

Capital structure means the mix of owners' funds (share capital, reserves) and borrowed funds (debentures, loans) used by a company.

Kinds of share capital (as shown in the balance sheet):

1. Authorised capital – the maximum capital a company can issue, as stated in its Memorandum of Association.
2. Issued capital – the part of authorised capital actually offered to the public.
3. Subscribed capital – the part of issued capital actually taken up (applied for) by the public.
4. Called-up capital – the part of subscribed capital the company has asked shareholders to pay.
5. Paid-up capital – the part of called-up capital actually received. Paid-up = Called-up − Calls in arrears.
6. Uncalled capital – the part not yet called. Reserve capital is uncalled capital that can be called only at winding up.

Types of Shares

Share: A share is the smallest unit into which the capital of a company is divided. Section 43 of the Companies Act, 2013 allows two kinds of share capital: equity and preference.

1. Equity shares – shares which are not preference shares. Holders are the real owners. They get dividend only after preference shareholders, and their rate of dividend is not fixed. They have voting rights. Equity shares may also be issued with differential rights (DVR) as to dividend or voting.

2. Preference shares – shares which carry two preferential rights: (a) dividend at a fixed rate before equity holders, and (b) return of capital first at the time of winding up. Types:

• Cumulative – unpaid dividend of one year is carried forward and paid later. Non-cumulative – unpaid dividend lapses.
• Participating – also share surplus profits with equity holders. Non-participating – only fixed dividend.
• Convertible – can be changed into equity shares. Non-convertible – cannot be changed.
• Redeemable – capital is returned after a fixed period. Under Section 55, a company cannot issue irredeemable preference shares; they must be redeemed within 20 years (longer only for infrastructure projects).

Sweat equity shares (Section 54) are issued to directors or employees at a discount or for non-cash consideration, for their know-how or value addition.

Methods of Issue of Shares

1. Public issue / prospectus – offer to the general public: IPO (first issue by an unlisted company) or FPO (further issue by a listed company). Governed by SEBI (ICDR) Regulations.
2. Private placement (Section 42) – offer to a selected group of persons (not more than 200 in a financial year, excluding QIBs and employees under ESOP).
3. Rights issue (Section 62(1)(a)) – new shares first offered to existing equity holders in proportion to their holding.
4. Bonus issue (Section 63) – free fully paid shares given out of free reserves, securities premium or capital redemption reserve.
5. ESOP – shares offered to employees under an Employee Stock Option Plan.
6. Book building – price is discovered through bids within a price band (used in most IPOs, e.g. LIC IPO 2022).

Price of issue:

• At par – at face value (e.g. ₹10 share for ₹10).
• At premium – above face value. The extra amount goes to Securities Premium A/c (Section 52). It can be used only for: issuing fully paid bonus shares, writing off preliminary expenses, writing off share/debenture issue expenses or discount, premium payable on redemption of preference shares/debentures, and buy-back of shares.
• At discount – below face value. Section 53 prohibits this, except sweat equity shares.

Payment in instalments: Application money → Allotment money → Calls (first, second, final). SEBI requires application money of at least 25% of the issue price in a public issue. If minimum subscription of 90% of the issue is not received, the whole application money must be refunded.

Accounting for Issue of Shares

Over-subscription: When applications are more than shares offered, the directors may (a) reject some applications and refund money, or (b) allot on a pro-rata basis and adjust excess application money towards allotment (and calls, if the articles allow). Calls in arrears = amount called but not paid. Calls in advance = amount paid before it is called; Table F allows interest up to 12% p.a. on calls in advance and 10% p.a. on calls in arrears.

Illustration 1 (Issue at premium): Vidarbha Textiles Ltd issued 10,000 equity shares of ₹10 each at a premium of ₹2 per share, payable: ₹3 on application, ₹5 on allotment (including premium ₹2) and ₹4 on first and final call. All shares were applied for, allotted and all money was received. Pass journal entries and show the balance sheet extract.

Solution: Journal of Vidarbha Textiles Ltd

Balance Sheet (extract)

Note 2: Reserves and Surplus – Securities Premium ₹20,000. Check: Bank receipts = 30,000 + 50,000 + 40,000 = ₹1,20,000 = Capital ₹1,00,000 + Premium ₹20,000.

Forfeiture of Shares

Forfeiture means cancelling the shares of a shareholder who fails to pay allotment or call money, as per the Articles of Association (Table F gives at least 14 days' notice). The shareholder loses the shares and the money already paid.

Shares issued at premium: if the premium has been received, Securities Premium A/c is NOT debited on forfeiture (it stays). If the premium has NOT been received, debit Securities Premium A/c also, because it was credited when allotment fell due.

Reissue of Forfeited Shares

Forfeited shares become the company's property and can be reissued at any price, but the discount on reissue cannot be more than the amount forfeited on those shares. The discount is debited to Share Forfeiture A/c. The balance left in Share Forfeiture A/c on reissued shares is a capital profit and is transferred to Capital Reserve A/c.

Illustration 2 (Forfeiture and reissue): Rohan held 200 equity shares of ₹10 each in Nagpur Agro Ltd (issued at par). He paid ₹2 on application and ₹5 on allotment but failed to pay the first and final call of ₹3. His shares were forfeited and later reissued to Seema as fully paid at ₹8 per share. Pass journal entries.

Working note: Amount forfeited = 200 × ₹7 = ₹1,400. Discount on reissue = 200 × (₹10 − ₹8) = ₹400. Capital profit = ₹1,400 − ₹400 = ₹1,000, transferred to Capital Reserve.

Recording Relevant Entries in the Balance Sheet

• Share capital is shown under Equity and Liabilities → Shareholders' Funds → Share Capital, with details in a note: Authorised, Issued, Subscribed and fully paid, Subscribed but not fully paid.
• Calls in arrears are deducted from subscribed capital in the note.
• Share Forfeiture A/c (on shares not yet reissued) is added to share capital in the note as "Add: Forfeited Shares".
• Securities Premium and Capital Reserve appear under Reserves and Surplus.
• Calls in advance are shown under Current Liabilities → Other Current Liabilities (not part of share capital).

Likely exam questions

1. (Long, 8/16 marks) What is forfeiture of shares? Explain the accounting treatment of forfeiture and reissue of forfeited shares when shares were originally issued at par and at premium.
2. (Long, 8/16 marks) Sunrise Ltd issued 20,000 equity shares of ₹10 each at a premium of ₹2, payable ₹3 on application, ₹5 on allotment (including premium) and ₹4 on first and final call. All shares were subscribed. Amit, holding 500 shares, failed to pay the call; his shares were forfeited and reissued at ₹9 per share fully paid. Pass journal entries and show the share capital note in the balance sheet.
3. (Short, 4 marks) Distinguish between equity shares and preference shares.
4. (Short, 4 marks) Explain the methods of issue of shares.
5. (Short, 4 marks) What is Securities Premium? State its uses under Section 52 of the Companies Act, 2013.

Syllabus topics (RTMNU)

• Indian Accounting Standards: Introduction
• Need & Objectives
• Ind AS 1, 2, 7, 16 and 110
• Introduction
• Statutory provisions regarding Preparation of Companies Final accounts
• Provision for interest on debentures
• Proposed Dividends
• Interim Dividend
• Preparation of Income Statement and Balance Sheet in the format prescribed by Companies Act-2013, Schedule-III (Excluding Managerial Remuneration)

Indian Accounting Standards: Introduction

Indian Accounting Standards (Ind AS) are accounting standards converged with International Financial Reporting Standards (IFRS). They are notified by the Ministry of Corporate Affairs (MCA) under Section 133 of the Companies Act, 2013 through the Companies (Indian Accounting Standards) Rules, 2015, on the recommendation of the ICAI and NFRA.

• Phase I (from 1 April 2016): listed and unlisted companies with net worth of ₹500 crore or more (voluntary adoption also allowed).
• Phase II (from 1 April 2017): all listed companies (other than SME-listed) and unlisted companies with net worth of ₹250 crore or more.
• Holding, subsidiary, joint venture and associate companies of the above also follow Ind AS. Banks and insurance companies have a separate roadmap.
• Other companies continue to follow the older Accounting Standards (AS) notified under the Companies (Accounting Standards) Rules.

Need and Objectives of Ind AS

1. Global comparability – Indian accounts become comparable with foreign companies.
2. Foreign investment – foreign investors trust accounts made on IFRS-like rules.
3. Listing abroad – easier for Indian companies to raise funds in foreign markets.
4. Fair value and true picture – more use of fair value gives a realistic position.
5. Uniformity – removes different practices and reduces manipulation.
6. Better disclosure and transparency for shareholders, lenders and regulators.

Ind AS 1, 2, 7, 16 and 110

Final Accounts of Companies: Introduction and Statutory Provisions

Final accounts of a company are its financial statements prepared at the end of the financial year to show profit or loss (Statement of Profit and Loss) and financial position (Balance Sheet). As per Section 2(40), financial statements include Balance Sheet, Statement of Profit and Loss, Cash Flow Statement, Statement of Changes in Equity (if applicable) and Notes. (A One Person Company, small company and dormant company need not prepare a cash flow statement.)

1. Section 128 – books of account kept at the registered office, on accrual basis and double entry system; preserved for 8 years.
2. Section 129 – financial statements must give a true and fair view, comply with accounting standards and be in the form given in Schedule III.
3. Section 133 – Central Government prescribes accounting standards.
4. Section 134 – statements approved by the Board and signed by chairperson/two directors, CEO, CFO and company secretary; Board's report attached.
5. Section 136 – copies sent to members at least 21 days before the AGM.
6. Section 137 – copy filed with the Registrar of Companies within 30 days of the AGM.
7. Section 123 – dividend only out of profits (after depreciation as per Schedule II) or free reserves.

Provision for Interest on Debentures, Proposed Dividends, Interim Dividend

Interest on debentures is a charge against profit, not an appropriation. It must be paid even if there is a loss. Full-year interest is shown under Finance Costs. Unpaid interest is shown under Other Current Liabilities (Interest accrued and due / accrued but not due).

Interim dividend is declared by the Board of Directors between two AGMs (Section 123(3)). Once paid, it is deducted from Surplus in the Reserves and Surplus note. It is not shown in the Statement of Profit and Loss.

Proposed (final) dividend is recommended by directors and approved by shareholders at the AGM after the year ends. As per revised AS 4 and Ind AS 10, it is not a liability on the balance sheet date, so no provision is made; it is only disclosed in the Notes to accounts.

Preparation of Statement of Profit and Loss and Balance Sheet (Schedule III)

Illustration 1: From the Trial Balance of Shree Ganesh Traders Ltd as on 31 March 2025, prepare the Statement of Profit and Loss and Balance Sheet as per Schedule III.

Adjustments: (1) Closing inventory ₹1,50,000. (2) Depreciation on plant and machinery 10%. (3) Debenture interest for the second half-year is outstanding. (4) Provide tax @ 30%. (5) Transfer ₹10,000 to General Reserve. (6) The directors propose a final dividend of ₹1 per share.

Solution: Statement of Profit and Loss for the year ended 31 March 2025

Balance Sheet as at 31 March 2025

Note 1: Share Capital – Issued, subscribed and fully paid 50,000 equity shares of ₹10 each ₹5,00,000.

Note on proposed dividend: The Board has proposed a final dividend of ₹1 per share (₹50,000), subject to approval at the AGM; not provided for (shown as a note only).

Illustration 2 (Surplus, interim dividend, debenture interest): Kamal Ltd has 1,00,000 equity shares of ₹10 and 12% Debentures of ₹5,00,000. During 2024-25 it paid debenture interest of ₹30,000 for half year and an interim dividend of ₹1.50 per share. Opening surplus ₹1,20,000; profit for the year (after full debenture interest and tax) ₹3,50,000; transfer to general reserve ₹35,000. Show the treatment.

Working: Debenture interest for the year = 12% × 5,00,000 = ₹60,000, shown under Finance Costs. Paid ₹30,000, so ₹30,000 is shown as interest accrued and due under Other Current Liabilities.

Likely exam questions

1. (Long, 8/16 marks) What are Indian Accounting Standards? Explain the need and objectives of Ind AS and briefly explain Ind AS 1, 2, 7, 16 and 110.
2. (Long, 8/16 marks) From the following Trial Balance of Mahalaxmi Ltd as on 31-3-2025 prepare the Statement of Profit and Loss and Balance Sheet as per Schedule III: Equity Share Capital ₹6,00,000; 12% Debentures ₹2,00,000; General Reserve ₹50,000; Trade Payables ₹90,000; Sales ₹10,00,000; Land and Building ₹5,00,000; Plant ₹2,00,000; Opening Stock ₹80,000; Purchases ₹6,00,000; Wages ₹50,000; Salaries ₹60,000; Debenture Interest ₹12,000; Trade Receivables ₹1,50,000; Cash ₹2,88,000. Closing stock ₹1,00,000; depreciate plant by 10%; provide tax @ 30%; outstanding debenture interest to be provided.
3. (Short, 4 marks) State the statutory provisions regarding preparation of final accounts of companies.
4. (Short, 4 marks) How are interest on debentures, interim dividend and proposed dividend treated in company final accounts?
5. (Short, 4 marks) Explain Ind AS 2 – Inventories.

Syllabus topics (RTMNU)

• Meaning of Banking Companies
• Functions of Banking
• Restrictions for a Banking Company
• Provision of the Banking Companies Regulation Act 1949
• Preparation of Annual Accounts as per Banking Companies Regulation Act 1949 as per amendment by RBI

Meaning of Banking Companies

Banking – Section 5(b) of the Banking Regulation Act, 1949: "accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise."

Banking company – Section 5(c): any company which transacts the business of banking in India. Examples: HDFC Bank Ltd, ICICI Bank Ltd, Axis Bank Ltd. (Public sector banks like SBI are formed under their own Acts, but the accounting provisions of the BR Act apply to them also.)

Features: (1) accepts deposits from the public; (2) lends or invests these deposits; (3) deposits are repayable on demand or otherwise; (4) withdrawal by cheque, draft or order; (5) works under the control of the Reserve Bank of India (RBI).

Functions of Banking

A. Primary functions

1. Accepting deposits – savings, current, fixed and recurring deposits.
2. Lending money – loans, cash credit, overdraft, discounting of bills of exchange.
3. Investment – in government securities and other approved securities.

B. Secondary functions

1. Agency functions – collecting cheques and bills, paying insurance premium, EMIs and bills on standing instructions, acting as trustee.
2. General utility functions – locker facility, demand drafts, letters of credit, bank guarantees, ATM/debit/credit cards, UPI and net banking, foreign exchange.

Restrictions for a Banking Company and Provisions of the Banking Regulation Act 1949

1. Sec. 6 – Forms of business: a bank can do only the businesses listed in Section 6.
2. Sec. 8 – No trading: a bank cannot directly or indirectly buy, sell or barter goods (except in connection with realisation of security).
3. Sec. 9 – Immovable property: property not needed for own use, acquired in satisfaction of claims, must be sold within 7 years.
4. Sec. 11 – Minimum capital and reserves as laid down in the Act (RBI now prescribes higher capital for new licences).
5. Sec. 12 – Capital structure: subscribed capital at least half of authorised capital and paid-up capital at least half of subscribed capital; voting rights capped.
6. Sec. 13 – Commission/brokerage on sale of shares cannot exceed 2.5% of the paid-up value of the shares.
7. Sec. 14 – No charge on unpaid capital.
8. Sec. 15 – Dividend: no dividend until all capitalised expenses (preliminary expenses, share-selling commission, brokerage, losses etc.) are completely written off.
9. Sec. 17 – Statutory (reserve) fund: at least 20% of net profit must be transferred to a reserve fund before any dividend is declared. RBI has directed banks to transfer 25% of net profit to the Statutory Reserve, so use 25% in numericals unless told otherwise.
10. Sec. 18 & 24 – Cash reserve and liquidity: banks must keep Cash Reserve Ratio (CRR) with RBI and Statutory Liquidity Ratio (SLR) in liquid assets (check the latest RBI rates).
11. Sec. 20 – Loans to directors: no loans or advances to its own directors or firms/companies in which they are interested (with limited exceptions).
12. Sec. 29 – Accounts: Balance Sheet and Profit and Loss Account in the forms of the Third Schedule (Form A and Form B), as at 31 March each year.
13. Sec. 30 – Audit by a qualified auditor, with prior approval of RBI.
14. Sec. 31 – Returns: accounts and auditor's report submitted to RBI within 3 months of the year end (extendable by 3 months).

Preparation of Annual Accounts as per Banking Regulation Act 1949 (as amended by RBI)

Form A – Balance Sheet (vertical form, supported by 12 schedules):

Form B – Profit and Loss Account: I Income (Interest Earned – Sch. 13; Other Income – Sch. 14); II Expenditure (Interest Expended – Sch. 15; Operating Expenses – Sch. 16; Provisions and Contingencies); III Profit/Loss (Net profit for the year + profit brought forward); IV Appropriations (Transfer to Statutory Reserve, Other Reserves, Balance carried over).

Important points for numericals:

• Rebate on bills discounted (unexpired discount) – discount received in advance for the period after 31 March is income of next year. It is deducted from discount income and shown under Other Liabilities and Provisions (Sch. 5).
• Non-Performing Asset (NPA) – an advance where interest or instalment is overdue for more than 90 days. Interest on NPAs is taken as income only when actually received.
• Classification and provision (RBI prudential norms): Standard assets – general provision 0.40% (higher for some sectors); Sub-standard (NPA up to 12 months) – 15%; Doubtful (sub-standard for 12 months) – secured part 25% (up to 1 year), 40% (1–3 years), 100% (above 3 years), unsecured part 100%; Loss assets – 100%.
• Acceptances, endorsements and guarantees are shown as Contingent Liabilities (Sch. 12).

Illustration 1 (Rebate on bills discounted): On 1 April 2024 Rebate on Bills Discounted showed ₹6,000. Discount received during 2024-25 was ₹40,000. Unexpired discount on 31 March 2025 is ₹9,000. Pass adjustment entries and show the Discount on Bills A/c.

Discount on Bills Account

Discount credited to P&L = 40,000 + 6,000 − 9,000 = ₹37,000. Rebate ₹9,000 appears under Other Liabilities (Sch. 5).

Illustration 2 (Form B): From the following of Vidarbha Bank Ltd for the year ended 31 March 2025 prepare the Profit and Loss Account in Form B. Interest and discount on advances ₹18,40,000; Income on investments ₹4,60,000; Commission, exchange and brokerage ₹1,20,000; Profit on sale of investments ₹30,000; Interest on deposits ₹11,50,000; Interest on RBI borrowings ₹50,000; Salaries and allowances ₹3,20,000; Rent, taxes and lighting ₹60,000; Printing and stationery ₹15,000; Depreciation ₹40,000; Directors' fees ₹10,000; Auditors' fees ₹15,000; Other expenses ₹50,000; Profit brought forward ₹48,000. Advances: Standard ₹2,00,00,000; Sub-standard ₹10,00,000; Doubtful (secured, 1 year) ₹4,00,000; Loss ₹50,000 (no earlier provision). Provide tax @ 30% and transfer to statutory reserve as per law.

Working Note 1: Provision for NPA

Working Note 2: Profit before tax = 24,50,000 − 12,00,000 − 5,10,000 − 3,80,000 = ₹3,60,000; Tax @ 30% = ₹1,08,000.

Profit and Loss Account (Form B) for the year ended 31 March 2025

Likely exam questions

1. (Long, 8/16 marks) Define a banking company. Explain the important provisions of the Banking Regulation Act, 1949 regarding the accounts of a banking company and the restrictions on its business.
2. (Long, 8/16 marks) From the following prepare the Profit and Loss Account of Janata Bank Ltd for the year ended 31-3-2025 in Form B: Interest on loans ₹12,00,000; Interest on investments ₹3,00,000; Commission ₹80,000; Interest on deposits ₹7,50,000; Salaries ₹2,40,000; Rent and taxes ₹40,000; Printing ₹10,000; Auditors' fees ₹8,000; Depreciation ₹22,000; Provision for NPA ₹1,00,000; Provision for tax ₹1,20,000. Rebate on bills discounted required ₹10,000 (not yet provided). Transfer 25% of profit to statutory reserve.
3. (Short, 4 marks) Explain the primary and secondary functions of a commercial bank.
4. (Short, 4 marks) What is rebate on bills discounted? How is it treated in the final accounts of a bank?
5. (Short, 4 marks) What is a Non-Performing Asset? State the classification of advances by RBI.

Syllabus topics (RTMNU)

• Introduction
• Loss of stock
• Average clause
• Practical problem on loss of stock

Introduction

Insurance is a contract in which the insurer (insurance company) agrees, in return for a premium, to make good the loss suffered by the insured due to a risk insured against (fire, flood, theft etc.). The contract document is called the policy. In India, general insurance is regulated by IRDAI. Examples of insurers: New India Assurance, ICICI Lombard.

Insurance claim is the amount the insured asks the insurance company to pay for the loss. Since a fire destroys stock and often books, the business must estimate the value of stock on the date of fire to prepare its claim.

Principles of general insurance: (1) Indemnity – only the actual loss is paid, not profit; (2) Utmost good faith – full disclosure of facts; (3) Insurable interest; (4) Subrogation – after paying, the insurer gets the rights over salvage; (5) Contribution; (6) Proximate cause.

Loss of Stock

Loss of stock policy covers the value of goods destroyed. Steps to calculate the claim:

1. Find the gross profit (GP) rate – usually from the previous year's Trading Account: GP Ratio = Gross Profit ÷ Net Sales × 100.
2. Prepare a Memorandum Trading Account from the date of the last balance sheet to the date of fire: Opening stock + Purchases (net) + Direct expenses + Gross profit (at GP rate on sales) − Sales = Stock on the date of fire (balancing figure).
3. Calculate loss of stock = Stock on date of fire − Value of stock salvaged (saved).
4. Apply the average clause if the policy has it and the stock is under-insured.

Adjustments to remember:

• Purchases: deduct purchase returns, goods taken by owner (drawings) and goods given as charity/samples; add goods received but not recorded.
• Sales: deduct sales returns; goods sent on approval and not yet accepted are not sales.
• Abnormal (slow-moving/obsolete) items do not earn the normal GP rate. Show them in a separate column of the Memorandum Trading Account.
• If opening stock was valued below cost (e.g. 10% below cost), restate it at cost first.

Average Clause

Average clause is a condition in a fire insurance policy which says that if the value of stock on the date of fire is more than the amount of the policy (under-insurance), the insured will bear a part of the loss himself. The insurance company pays only the proportion of the loss that the policy bears to the total stock.

• Average clause applies only when the policy amount is less than the value of stock on the date of fire.
• If the policy amount is equal to or more than the stock value, the full loss is paid (claim cannot exceed the policy amount).
• Purpose: to discourage under-insurance and make the insured pay full premium.

Practical Problems on Loss of Stock

Illustration 1: A fire occurred in the godown of Sai Traders, Nagpur on 15 September 2024. From the following, calculate the claim: Stock on 1 April 2024 ₹80,000; Purchases from 1 April to 15 September ₹2,40,000; Sales during the same period ₹3,20,000; Gross profit rate 25% on sales; Stock salvaged ₹15,000. The stock was insured for ₹50,000 subject to average clause.

Solution: Memorandum Trading Account (1-4-2024 to 15-9-2024)

Since the policy (₹50,000) is less than the stock (₹80,000), the average clause applies. Claim = ₹40,625.

Illustration 2 (GP rate from last year, abnormal goods): A fire broke out in the premises of Ganesh Stores on 31 August 2024. Trading Account for 2023-24: Opening stock ₹50,000; Purchases ₹4,00,000; Wages ₹30,000; Sales ₹5,25,000; Closing stock ₹60,000. From 1 April 2024 to 31 August 2024: Purchases ₹2,10,000; Purchase returns ₹10,000; Wages ₹15,000; Sales ₹3,00,000; Sales returns ₹10,000; Goods taken by the owner (at cost) ₹5,000. Opening stock included obsolete goods costing ₹8,000 which were sold for ₹5,000 (included in sales). Stock salvaged ₹6,000. Policy ₹25,000 with average clause. Compute the claim.

Working 1: Previous year's Trading Account (to find GP rate)

GP rate = 1,05,000 ÷ 5,25,000 × 100 = 20%.

Working 2: Memorandum Trading Account (1-4-2024 to 31-8-2024)

Net sales = 3,00,000 − 10,000 = 2,90,000; normal sales = 2,90,000 − 5,000 (abnormal) = ₹2,85,000.

Policy ₹25,000 is less than stock ₹34,000, so average clause applies. Claim = ₹20,588.

Likely exam questions

1. (Long, 8/16 marks) What is the average clause in a fire insurance policy? Explain the steps to calculate the claim for loss of stock with a suitable example.
2. (Long, 8/16 marks) A fire occurred on 30-6-2024 in the premises of Laxmi Traders. Stock on 1-4-2024 ₹60,000; Purchases till date of fire ₹1,50,000; Sales ₹2,00,000; Gross profit 25% on sales; Stock salvaged ₹10,000; Policy ₹40,000 subject to average clause. Prepare the Memorandum Trading Account and calculate the claim.
3. (Short, 4 marks) What is an insurance claim? Explain the principle of indemnity.
4. (Short, 4 marks) Explain the treatment of abnormal items while calculating loss of stock.
5. (Short, 4 marks) Stock on date of fire ₹1,20,000; salvage ₹20,000; policy ₹90,000 with average clause. Calculate the claim.