ACCOUNTING FOR BUSINESS I

1. FIRE INSURANCE CLAIM

2. MEANING AND NEED OF FIRE INSURANCE
• Fire insurance is a crucial form of insurance that safeguards
individuals and businesses against the devastating
consequences of fire-related incidents. By offering
comprehensive financial protection, this insurance covers
damages resulting from fires, lightning strikes, explosions, and
named perils. It goes beyond the standard limits set by regular
property insurance policies, providing additional coverage for
the replacement, repairs, or reconstruction of insured properties
like buildings, inventory, and equipment.

3. Need of fire insurance claim
• Fire insurance, while crucial for some, extends its protective embrace to a wide array of individuals and entities. Here's
a snapshot of who stands to benefit:
• Homeowners: Your home is a place of cherished memories and irreplaceable possessions. Fire insurance is a safety
net that ensures that your haven remains shielded against the ravages of fire, offering financial security to rebuild and
restore.
• Business Owners: From small enterprises to sprawling corporations, businesses invest years of effort and resources
into their operations. Fire insurance safeguards not only physical assets but also the continuity of operations, ensuring
that a fire-related setback doesn't disrupt the flow of commerce.
• Property Owners and Landlords: Those who lease or rent out properties bear a responsibility to safeguard their
tenants' interests. Fire insurance provides a layer of protection for the property owner's investment and can also extend
coverage to the belongings of tenants.
• Construction Projects: Builders and contractors engaged in construction projects, whether residential or commercial,
benefit from fire insurance. It shields the investments made into materials, labor, and progress against the unexpected
threat of fire.
• Financial Institutions: Lenders and financial institutions that have vested interests in properties or assets require fire
insurance to protect their collateral from fire-related risks.
• Institutions and Public Buildings: Educational institutions, hospitals, government buildings, and other public
structures are essential to a community's well-being. Fire insurance ensures that these institutions can be swiftly rebuilt
and restored in case of fire-related damage.

4. ADVANTAGES OF FIRE INSURANCE CLAIM
1.Provides Protection
• Insurance coverage does reduce the impact of loss that one bears in perilous situations. It provides monetary
reimbursement during financial crises. It not only protects the insured from financial woes but also helps in checking
mental stress arising out of it.
• 2. Provides Certainty
• Insurance coverage provides a feeling of assurance to the policyholders. The insured pays a small portion of the
income for this certainty that will help in the future. So, there is a certainty of handsome financial aid against the
premium. It will protect the policy buyer when met with accidents, hazards, or any vulnerabilities.
• 3. Risk Sharing
• The very manner in which insurance policy functions makes it a cooperative scheme. An insurer would be unable to pay
from one’s capital. An insurance company pools in collective risks and premiums because it covers a large number of
risk-exposed people. The payout to the one who claims insurance coverage is out of this fund. Thereby, all
policyholders share the risk of the one who actually suffered the loss.
• 4. Value of Risk
• Insurance policy assesses the volume of risk and also anticipates the various causes of it. It evaluates the amount for
insurance coverage and the premium payment amounts on a risk value basis. It safeguards against unforeseen events
and consequential loss.

5. SALVAGE VALUE

6. AVERAGE CLAUSE
• a clause in an insurance policy that restricts the amount
payable to a sum not to exceed the value of the property
destroyed and that bears the same proportion to the loss as the
face of the policy does to the value of the property insured
• An average clause is applied to find out the value of a claim
where value of the stock on the date of fire is more than the
value of insured stock. Average clause is applied by the
insurance companies to discourage the under insurance of
stock or any other assets.

7. PROBLEMS IN FIRE INSURANCE
• A fire occurred on 15th December, 2011 in the premises of D Co. Ltd. From the following
figures, calculate the amount of claim to be lodged with the insurance company for loss of
stock:

8. Fire occurred in the premises of X Ltd. on 10th January, 2012. All stocks were destroyed
except to the extent of Rs 62,000.It was the practice of the firm to value stock at cost less
10%. Early in April, 2011, prices were raised by 5%
Since the rate of gross profit is not given, it is necessary to prepare Trading Account for
2010-11. The stocks being valued at 10% below cost, the value of stocks must be increased by
1/9 to bring them up to their full cost which is the normal practice.

9. CLAIM FOR LOSS OF STOCK
Mr. A prepares accounts on 30th September each year, but on 31st
December, 20X1 fire destroyed the greater part of his stock. Following
information was collected from his book:
Stock as on 1.10.2021 29,700 Purchases from 1.10.2021 to 31.12.2021
75,000 Wages from 1.10.2021 to 31.12.2021 33,000 Sales from 1.10.20X1 to
31.12.2021 1,40,000 The rate of gross profit is 33.33% on cost.
Stock to the value of 3,000 was salvaged. Insurance policy was for 25,000
and claim was subject to average clause. Additional information:
(i) Stock at the beginning was calculated at 10% less than cost.
(ii) A plant was installed by firm’s own worker. He was paid ` 500, which was
included in wages.
(iii) Purchases include the purchase of the plant for ` 5,000 You are required
to calculate the claim for the loss of stock.

10. • Memorandum Trading Account for period from 1.10.2021 to
31.12.2021
Particulars Rs Particulars Rs
To opening stock 33000 By Sales 140000
To purchase
-(purchase return)
70000 By stock on date of
fire
30500
To wages 32500
To gross profit
(25% on 140000)
35000
170500 170500

11. • Computation of claim for loss of stock:
Stock on the date of fire - Salvaged stock = loss of stock
30500-3000 = 27500
Amount of claim = Insured value/ stock on the date of fire × loss of
stock
= 25,000/30500x27,500 = 22,541

12. 2) On 12th June, 2022 fire occurred in the premises of N.R. Patel, a
paper merchant. Most of the stocks were destroyed, cost of stock
salvaged being 11,200. In addition, some stock was salvaged in a
damaged condition and its value in that condition was agreed at
10,500. From the books of account, the following particulars were
available. 1. His stock at the close of account on December 31, 2021
was valued at 83,500. 2. His purchases from 1-1-2022 to 12-6-2022
amounted to 1,12,000 and his sales during that period amounted to `
1,54,000. On the basis of his accounts for the past three years it
appears that he earns on an average a gross profit of 30% of sales.
Patel has insured his stock for 60,000. Compute the amount of the
claim

13. Computation of claim for loss of stock
Particulars Rs
To opening stock 83500
Add Purchase 112000 195500
Less sales and gross profit
(154000+46200)
(107800)
87700
Less (Stock salvaged) 21700
Amount of claim =
60000/87700*60000
= 45154
= 66000

14. ACCOUNTS OF NON PROFIT
ORGANISATIONS

15. Non Trading Organisation Meaning and
Characteristics
• Non-trading concerns usually maintain their accounts by the double entry
system and periodically prepare their final accounts for the submission to their
members and subscribers. The method of preparing final accounts by non
trading concerns is different than trading concerns.
• The method of preparing final accounts by non trading concerns is different
than trading concerns. As these concerns do not deal in any goods like trading
concerns, so they cannot prepare a trading and profit and loss account. At the
end of the year they make out an account called an Income and expenditure
account and balance sheet. The Income and expenditure account serve the
same purpose as the profit and loss account in the case of trading concerns
and is made out exactly in the same manner.
• Usually the non-profit making institutions do not maintain a full set of books
but merely a cash book in which all receipts and payments are entered. At the
end of the year the cash book is summarised under suitable heads and the
summary thus prepared is called a Receipt and Payment Account. In order to
know the result of the year's working it should be converted into Income and
expenditure account.

16. Characteristics
• Objective
• The main objective of non-trading concerns is to provide goods or services that fulfill a social need. There is neither a profit motive nor an
expectation of earning net income.
• Sources of Income
• In a non-trading concern, the main sources of income are fees, subscriptions, donations, government and municipal grants, and other
similar sources.
• Distribution of Income
• No part of the excess of income over expenditure is distributed to those who contributed support through subscriptions or donations (e.g.,
in the form of dividends).
• Use of Income
• The excess of income over expenditure is usually used in later years to provide better goods and services to the citizens of the area.
• Management
• The control and management of non-trading concerns rest in the hands of trustees or a governing body committee of management.
• Maintenance of Accounts
• Typically, the accounts of a non-trading concern are maintained using the double entry bookkeeping system.
• At the end of the year, a summary is created, which is known as the income and expenditure summary and balance sheet.
• These institutions and societies do not maintain a full set of books. Only a cash book is maintained in which all receipts and
payments are entered.

17. RECEIPTS AND PAYMENT ACCOUNT
• Receipts are in the form of cash or bank. Receipts show transactions of
how much an organisation or business entity receives in cash or bank from
sales or any other source during an accounting year.
• Payments are a type of expense or disbursement that is done in either
cheques or any mode. Payments as the word suggests are just paying for
a desired asset or acquisition and not actually using it further for any other
purpose i.e making it an expense.
• That takes us towards understanding what receipts and payment accounts
do. So, a receipt and payment account is a type of account that is
prepared on the very last day of the accounting year. The account records
all the cash amounts whether they relate to the previous year, current year
or upcoming year, received or paid during an accounting period. These are
directly taken from the Cash Book of an accounting year. This account is
made by non-profit organisations with the sole purpose of recording
transactions, further using it for income and expenditure accounts.

18. INCOME AND EXPENDITURE ACCOUNT
• An Income and Expenditure Account is the detailed summary of every income and
expense incurred by an organization in a specific financial year. Prepared on an accrual
basis, this account records every income and expense in a particular year, irrespective of
whether they are clear or not. Outlined by non-trading entities, this account
distinguishes capital from revenue and takes only the latter into account.Typically, these
are nominal accounts, which outline an organization’s final accounts and are similar to
that of profit and loss accounting by a business entity. These accounts primarily serve to
find the surplus or deficit balance of an organization, taking both current income and
expenses into account.
• Surplus and Deficit Balance of an Income and Expenditure AccountWhen the revenue
generated by a non-trading or non-profitable organization exceeds the total expenditure
incurred in a financial year, the Income & Expenditure account shows a surplus balance.
It is usually termed as excess income over expenditure. Contrastingly, if the revenue
generated by an organization falls short of its annual expenditure, the format of the
Income and Expenditure account shows a deficit balance. Be its surplus or deficit, only its
closing balance is taken into consideration.

19. BALANCESHEET
• A balance sheet is a financial statement that reports a
company's assets, liabilities, and shareholder equity.
• The balance sheet is one of the three core financial statements
that are used to evaluate a business.
• It provides a snapshot of a company's finances (what it owns
and owes) as of the date of publication.
• The balance sheet adheres to an equation that equates assets
with the sum of liabilities and shareholder equity.
• Fundamental analysts use balance sheets to calculate financial
ratios.

20. Various Terms Related To Non Trading
Organisation
• Tax-Exempt Status: Non-profit firms are granted tax-exempt status by the state, which means they are not obligated to
pay federal income taxes. This status is contingent on their adherence to specific rules, primarily focused on using their
resources for charitable or mission-driven goals rather than profit generation.
• Donations and Contributions: A basic aspect of non-profits is their reliance on financial support from individuals,
corporations, foundations, and other sources. These donations and grants serve as the lifeblood of non-profit firms,
enabling them to carry out their missions.
• Fundraising Activities: Non-profits engage in various fundraising activities to raise funds for their programs and
initiatives. These activities may include hosting events, seeking grant funding, leading direct mail campaigns, and
leveraging online crowdfunding media.
• Restricted and Unrestricted Funds: Non-profits often receive funds with specific titles, such as donations intended for a
particular project or program (restricted funds) and those that can be used at the firm's discretion (unrestricted funds).
Proper management and reporting of these funds are vital to ensure compliance with donor intentions.
• Grant Income: Many non-profits secure grants from government agencies, private foundations, and other firms to
support specific projects or initiatives. These grants often come with specific guidelines and reporting needs.
• Program Services: Unlike for-profit entities that aim to yield profits through the sale of products or services, non-profits
provide program services that align with their missions. These services typically address social, environmental, or
community needs.
• Volunteer Labor: Volunteerism is a cornerstone of many non-profit firms. Volunteers donate their time, skills, and
expertise without monetary payment, allowing non-profits to expand their impact while misjudging labor costs.

21. • Board of Directors: Non-profits are governed by a board of directors or trustees, responsible for
providing oversight and strategic direction. Board members often serve in a voluntary capacity and
play a critical role in ensuring the firm's mission is fulfilled.
• Fund Accounting: Non-profits frequently use fund accounting, a technical accounting method, to
track funds singly based on their intended use or donor restrictions. This approach helps maintain
clarity and ensures funds are used as intended.
• Public Reporting: Non-profits are needed to reveal their financial data and activities transparently in
public filings, such as Form 990 in the United States. This clarity is vital for keeping public trust and
accountability.
• Mission and Impact Reporting: Rather than focusing solely on financial profits, non-profits prioritize
reporting on their mission-driven activities and the impact they achieve in their residents or for their
causes. Proving the efficacy of their work is a critical aspect of non-profit accountability.
• Tax Deductibility for Donors: One of the incentives for charitable giving is that grants to qualified
non-profit firms are often tax-deductible for donors. This can encourage individuals and firms to
support non-profit causes.
• Asset Lock: Non-profits typically do not have owners or shareholders who benefit financially from
the firm's success. Instead, any surplus funds are reinvested into the firm's mission or used for
charitable purposes, creating an "asset lock" that ensures resources are saved for the public good.

22. • Public Benefit: Non-profits are managed to provide a public or community benefit, and their activities are hoped to serve
a broader societal purpose rather than personal or shareholder enrichment.
• Lack of Ownership: Non-profits lack traditional owners or shareholders. Instead, they are governed by a board of
directors or trustees who act as stewards of the firm, ensuring it remains dedicated to its mission.
• Legacies: A legacy is a sum of money left by an individual to a non-profit firm in their will. If the will specifies how the
money should be used, it is believed to be a specific legacy and recorded as a liability in the Balance Sheet. If no
purpose is mentioned, it is treated as a general legacy and shown as income in the Income and Expenditure A/c.
• Subscriptions: Subscriptions form a significant portion of a non-profit firm's income. These are fees paid by members to
maintain their membership in the firm. In simple terms, this can be seen as membership fees that individuals pay to the
firm to keep their membership active. The subscription amount is recorded on the receipt side of the Receipts and
Payments A/c and the Income side of the Income and Expenditure A/c. The recording process differs slightly between
the two, with the former recording the amount received during the year, regardless of the due period, and the latter
recording the amount for the current year, whether received or not.
• Government Grants: Non-profit firms may also receive grants from the government. These can be specific or general. A
specific grant is transferred to the respective account, while a general grant is recorded as income in the Income and
Expenditure A/c.
• Life Membership Fees or Entrance Fees: Some members may choose to pay a lump sum as life membership fees
instead of monthly or yearly subscription fees. This is displayed under the Capital fund in the Balance Sheet.

23. SUMS ON RECEIPTS AND PAYMENT
From the following information of GG Organisation, calculate cash at
bank at the end of the year and prepare Receipts and Payment Account
for the year ending 2021-22: 1. Balance at the beginning of the year,1-
4-2021: Cash at Bank ₹43,200 Cash in Hand ₹17,940 2. Subscriptions
received ₹6,750 3. Sundry payments: Rent and Taxes ₹1,900 Printing
and Stationery ₹3,160 Salaries ₹14,700 4. Sundry receipts: Interest on
Investment ₹5,500 Sale of Furniture ₹11,400 Bank Interest ₹800 5.
Entrance fees received for the year 2021-22 ₹9,700 6. Balance at the
end of the year,31-3-2022: Cash in Hand ₹21,870

25. • From the following information of GFG Club, prepare Receipts and Payment
Account for the year ending on 31st March, 2022. Cash at Bank at the year
end was ₹1,97,300. Find Cash in Hand at the year ending1. Balance on 1st
April,2021:Cash at Bank ₹83,200Cash in Hand ₹27,000 2. Subscriptions
received ₹64,200 (including ₹11,100 for 2020-21 and ₹16,300 for 2022-23)
3. Special Subscriptions for Governor’s Party ₹49,000 4. Sundry Receipts
Locker rent ₹31,500 Sale of Old Newspapers ₹1,750 Profit from
Entertainment ₹22,800 Rent realized from Club Hall ₹35,500 Interest
received from Investment ₹8,000 5. Sundry Payments: Salaries ₹28,000
(₹6,500 includes for 2020-21) Postage and Stationery ₹2,020 Electricity
charges ₹1,765 Purchase of Library Books ₹30,200 Expenses on Dance and
Socials ₹1,980 6. Life Membership Fees ₹12,630 and Entrance fees ₹1,590
of the club 7. Investments purchased by the Organisation worth ₹20,000 8.
Honorarium paid by the Organisation ₹3,050

27. SUMS RELATED TO INCOME AND
EXPENDITURE
• The following is the statement of receipts and payments of the Charity Eye Hospital for
the year ending March 31, 2012: You are asked to prepare the Income and Expenditure
Account for the year and the Balance Sheet as on 31st March, 2012. The other assets on 1st
April 2011 were—Furniture, Rs 2,000; Land, Rs 50,000; Buildings Rs 1,50,000;
Instruments, Rs 3,500. Write off depreciation at 2 1/2% on Buildings, 6% on Furniture,
and 20% on Instruments (including new). The Government Securities of the face value of
Rs 2 00 000 (cost Rs 1.80,000) represent investments of the Endowment Fund.
Subscriptions received include Rs 10,000 for the year 2010 – 11 but Rs 7,000 is
outstanding for 2011-2012 Salaries paid include Rs 4,000 for 2010-11 but Rs 4,5000 is
payable for 2011-2.012. Interest received includes Rs 5,000 for 2010-2011 but Rs 5.300 is
outstanding for 2011-2012.

29. 2) The following is the receipts and payments account of Entertainment Club for the year
ended 31st March, 2011:The following additional information is provided to you: (i) On 31st
March, 2011, apart from cash in hand and at Bank as shown in receipts and payments
account, the club held the following assets: Furniture Rs 1,80,000; Equipment’s Rs
1,20,000; Fixed Deposits with Bank Rs 3,00,000; Entertainment Material Rs 49,000; Stock
of Stationery Rs 1,000; Subscriptions in Arrear Rs 15,000 and Unexpired Insurance Rs
5,600 The club had no liability on that date: (ii) The club has 220 members, each paying Rs
3,000 as yearly subscription. (iii) On 31st March, 2011 stock of entertainment material was
valued at Rs 52,000. Stock of stationery with the club on that date was Rs 2,100. Rent
amounting to Rs 9,000 for March, 2011 was outstanding on that date. (iv) Depreciation is
provided on furniture @ 10% p.a. and on equipment’s @ 15% p.a. Depreciation on
equipment’s purchased during the year is to be provided for 6 months. You are required to
prepare income and expenditure account for the year ended 31st March, 2011 and balance
sheet as at that date.