This PPT explains about the basic accounting concepts of fire insurance claim with help of some numerical examples.it help the reader to understand the concepts in simplified manner. It is only created for educational purpose.

1. PREPARED BY-
RISHAV KUMAR
ASSISTANT PROFESSOR
DEPARTMENT OF COMMERCE
SRM-IST RAMAPURAM, CHENNAI
TOPIC:- ACCOUNTING FOR FIRE INSURANCE CLAIM

2. What is Insurance?
• Insurance is a contract in which one party pays another for losses
caused by particular calamities or perils.
• There are various kinds of Insurance such as Health insurance, Motor
insurance, Life insurance & Fire insurance and others.

3. What is fire Insurance?
Meaning:-
• Fire insurance is a risk management tool that offers financial
security and compensation in the event of a fire incident.
• By paying regular premiums to an insurance company, the
policyholder (the insured) transfers the risk of fire-related losses
to the insurer.
• In return, the insurer agrees to provide compensation or
reimbursement for the actual damages suffered by the insured
property due to fire, up to the policy's specified coverage limit.

4. What is Fire insurance Claim?
• A fire insurance claim is a request for compensation for the damages or
losses caused by fire to your property.
• Claim = Loss Suffered x Insured Value/Total Cost.

5. Need of Fire Insurance
• Protection against financial loss due to fire-related damages.
• Safeguards Stocks.
• Ensures business continuity by covering fire-related losses for
businesses.
• Compliance with legal and lender requirements for property owners.
• Offers peace of mind, knowing there is financial protection.
• Helps mitigate the risk associated with unpredictable fire incidents.
• Supports building repairs and reconstruction after a fire.

6. Advantages of Fire Insurance
• Financial protection against fire-related losses.
• Safeguards personal belongings and valuable assets.
• Ensures business continuity during fire incidents.
• Provides liability coverage for damage to others' properties or
injuries.
• Brings peace of mind to property owners and businesses.
• Compliance with legal and lender requirements.
• Helps mitigate financial risks associated with fires.
• Supports rebuilding and reconstruction after a fire.

7. Salvage value
• Salvage value is the value of the damaged property or its parts that
can be salvaged or recovered after a fire.
• The insurance company may consider the salvage value when settling
the claim, as it reduces the overall cost of the claim.
• For example, if a building covered by fire insurance suffers significant damage,
the insurance company's adjuster will assess the remaining value of the structure
and its salvageable components, such as reusable materials or undamaged parts.
This salvage value would then be taken into account when calculating the overall
claim amount that the insurance company will pay to the insured to repair or
rebuild the damaged property.

8. Average Clause
• The "average clause," also known as the "underinsurance clause" or
"condition of average," is a provision commonly found in fire insurance
policies.
• This clause comes into play when the insured property is not adequately
insured for its full value at the time of a loss, and it affects the calculation
of the claim amount.
• The clause applies when the sum insured (coverage limit) is less than the
actual value of the property or its reinstatement cost.
• if the sum insured is less than the actual value, the insurance company will
only pay a proportionate amount of the claim based on the ratio of the
sum insured to the actual value.

9. Example of Average Clause
• suppose a building's actual value is Rs 500,000, but the property
owner insures it for only Rs 300,000. If a fire occurs Rs 100,000 worth
of damage, the claim amount would be calculated using the average
clause as follows:
Claim Amount = (300,000 / 500,000) * 100,000 = Rs 60,000
In this scenario, the property owner would only receive Rs 60,000 as the claim
amount, even though the total loss was Rs 1,00,000, due to the property being
underinsured.

10. • EXAMPLE:- (when rate of Gross Profit and policy amount is not given):
On 15th June 2015, the premises and stock of a firm was destroyed by fire but the
accounting records were saved from which the following particulars are available:
RS
Stock on 1.1.2014 73,500
Stock on 31.12.2014 81,900
Purchases for the year 2014 3,98,000
Sales for the year 2014 4,87,000
Purchases from 1.1.2015 to 15.6.2015 1,62,000
Sales from 1.1.2022 to 15.6.2015 2,31,200
The stock salvaged was Rs 5,300. Show the amount of claim
(Mumbai University, T.Y.B.Com. Modified)