1. Determine the indemnity period - the time it would take to restore business to pre-loss level of turnover. 2. Calculate the affected period turnover - the actual turnover during the indemnity period. 3. Estimate the standard turnover - the turnover the business could reasonably expect to achieve during the indemnity period. 4. Calculate the shortfall in turnover by deducting the affected period turnover from the standard turnover. 5. Apply the business profit rate to the shortfall to determine the loss of profit claim amount.

1. Dr.M.PREMANANTHAM
Asst.Prof.of Commerce(CA)
VivekanandaCollege
TiruvedakamWest – 625 234
Madurai

2. To ascertain the profit or loss made by each department, a
separate Trading and Profit and loss account for each department is
prepared at the end of the year. It helps the management to ascertain
the performance of each department and take proper decision making.
Direct Expenses
Expenses which are directly charged to a particular department
or identified with a particular departments is called as direct expenses.
Indirect Expenses
Expenses which are not identified to a particular department is
known as indirect expenses

3. The proprietor of a departmental store wished to ascertain
approximately the net profit of the M, N and O departments
separately for the three months ended 31st March 2015. The
normal rates o gross profit for the three departments
concerned are respectively 40%, 30% and 20% on turnover
before charging the direct expenses. The indirect expenses are
charged in proportion to department turnover. The following
are the figures for the departments.
M (Rs.) N (Rs.) O (Rs.)
Opening stock (1.1.2015) 10,000 1,4000 7,000
Purchases 12,000 13,500 9,700
Sales 20,000 18,000 16,000
Direct expenses ,2000 1,500 700

4. The total indirect expenses for the period (including
those relating to other departments) were Rs.5400 on the total
turnover of Rs. 108000.
Prepare a statement showing the approximate net profit,
making a stock reserve of 10% for each deparment on the
estimated value on 31.3.2015.

5. Solution:
Particulars M
Rs.
N
Rs.
O
Rs.
Particulars M
Rs.
N
Rs.
O
Rs.
To Op.Stock 10,000 14,000 7,000 By Sales 20,000 18,000 16,000
To Purchases 12,000 13,500 9,700 By Cl. stock
(Bal.Fig)
10,000 14,900 3,900
To Gross Profit 8,000 5,400 3,200
30,000 32,900 19,900 30,000 32,900 19,900
To Direct Exp. 2,000 1,500 700 By Gross Profit 8,000 5,400 3,200
To Indirect Exp. 1,000 900 800
To Stock reserve
@ 10%
1,000 1,490 390
To Net Profit
(Bal.Fig)
4,000 1,510 1,310
8,000 5,400 3,200 8,000 5,400 3,200

6. Note: 1. Direct expenses are not shown in Trading A/c
because rates of gross profit given are before charging the
direct expenses.
 Indirect expenses applicable to the three departments.
54000 X 5400
108000
=Rs.2700 to be apportioned in the ratio of 10:9:8

7. From the following information, prepare departmental trading
and profit & loss A/c columnar form of the three departments
of Muthu Dry Cleaners Ltd.
Goods were transferred from one department to another at
cost price as follows:
Particulars Dry cleaning
(Rs.)
Darning
(Rs.)
Dyeing
(Rs.)
Stock 1.1.2016 400000 340000 940000
Stock 31.12.2016 330000 438000 817000
Purchases 1959000 697000 1373000
Sales 4000000 2000000 4000000
Wages 72800 300000 246000

8. (i) Darning to dry cleaning Rs.2400 and to dyeing Rs.40200
(ii) Dyeing to dry cleaning Rs.25800 and to darning Rs.18000
(iii) Dry cleaning to darning Rs.3000 and to dyeing Rs.24000
Apportion equally:
Stationery Rs.5418
Postage Rs.4050
General expenses Rs.237618
Insurance Rs.10080
Depreciation Rs.32598
Rent & taxes Rs. 180000 is to be split in proportion to space occupied,
i.e.., dry cleaning 4, darning 2, dyeing2 and other space 2.

9. Solution:
Muthu Dry Cleaners Ltd.
Departmental Trading & Profit and Loss A/c for three months ended 31.12.2016
Particulars Dry
cleaning
Darning Dyeing Particulars Dry
cleaning
Darning Dyeing
To Op. stock 400000 340000 940000 By Sales 4000000 2000000 4000000
To Purchases 1959000 697000 1373000 By Inter-
dept.transfers
27000 42600 43800
To Inter-dept.transfers 28200 21000 64200 By Cloing stock 330000 438000 817000
To Wages 728000 300000 246000
To Gro.Profit c/d 1241800 1122600 2237600
4357000 2480600 4860800 4357000 2480600 4860800
To Stationery 1806 1806 1806 By Gro.Profit b/d 1241800 1122600 2237600
To Postage 1350 1350 1350
To General Exp. 79206 79206 79206
To Insurance 3360 3360 3360
To Depreciation 10866 10866 10866
To Rent & taxes 72000 36000 36000
To Net Profit 1073212 990012 2105012
1241800 1122600 2237600 1241800 1122600 2237600

10. SELF BALANCING
LEDERS

11. Meaning:
It is a practical system of accounting, under which a main
ledger is sub-divided into different ledgers as per their nature. Each
ledger should be balanced individually, without the help of other
ledgers.
The ledger is divided into three sections.
a) Debtors or Sales Ledger
b) Creditors or Purchase Ledger
c) General Ledger

12. Prepare the sales ledger adjustment A/c from the following
information relating to the year ended 31.12.2013
PARTICULARS Rs. PARTICULARS Rs.
Opening balance of debtors 40000 Bills receivable dishonoured 500
Sales (for cash of Rs.10000) 90000 Bad debts 1000
Cash received from debtors 80000 Transfer to purchase ledger 2000
Discount allowed to debtors 500 Reserve for doubtful debts 1500
Bills receivable received from
debtors
3000 Bad debts of last year received 1000
Sales returns 8000

13. Solution
In the General ledger
Sales ledger Adjustment A/c
2013 PARTICULARS Rs. 2013 PARTICULARS Rs.
Jan.1
Dec.31
To Balance b/d
To General Ledger Adjustment A/c
Bills receivable dishonoured
Sales
40000
500
80000
Dec.31 By General Ledger
Adjustment A/c
Cash
Discount allowed
B/R (Received)
Sales Returns
Bad debts
Transfer
By Balance c/d
80000
500
3000
8000
1000
2000
26000
120500 120500

14. Fire Insurance Claims –
Loss of Stock

15. Fire Insurance
Fire insurance is a device to compensate for the loss
consequent upon destruction by fire.
Claim
A demand on the insurer to fulfill its promise as per the
terms and conditions of the policy is called a claim.
Need for Fire Insurance
Fire, in the business premises of any firm, can damages a
number of assets like stock, buildings, furniture, fixtures,
machinery etc. In addition, the normal working of a firm is
affected for a number of days or months, resulting in loss of
sales and loss of profits.
It is very difficult for a business to replace all the
destroyed assets and normalize its working without affecting its
working capital position and cash position.

16. Problem: 1
A fire occurred at the premises of a trader on May31,
destroying a great part of his stock which, on January 1, appeared in
the books at Rs.60000. The value of the stock salvaged was Rs.13500.
The gross profit on sales was 30% and sales amounted to Rs.153000
from January to date of fire, while for the same period, the purchases
amounted to Rs.108500.
Prepare a statement of claim for submission to the Insurance
Company.

17. Solution
Memorandum Trading A/c for the period ended May 31.
Statement of Claim: Rs.
Stock on the date of fire 61,400
Less: Stock salvaged 13,500
Claim to be made 47,900
PARTICULARS Rs. PARTICULARS Rs.
To Opening stock 60,000 By Sales 1,53,000
To Purchases 1,08,500 By Stock on the date
of fire (Bal.Fig)
61,400
To Gross Profit (153000 x 30/100) 45,900
2,14,400 2,14,400

18. Average Clause
Insurance policies for loss of stock may include average
clause. This clause is needed to discourage under insurance.
If stock on the date of fire is more than the insured stock,
average clause must be applied to compute claim.
Actual loss of stock= Stock on the date of fire- Salvage value.
Claim to be lodged= Insured stock
X Actual loss of stock
Stock on the date of fire

19. Various terms used in computation of loss of profit claim:
Indemnity period
Affected period
Turnovers
 Affected period turnover
 standard turnover
Annual turnover
Accounting year turnover
 Saved turnover
Standing charges
Short Sales