Financial Accounting · Insurance Claim for Loss of Stock and Loss of Profit

Loss of Stock Claim Computation: Memorandum Trading Account to Final Claim

Updated 10 October 2026 · Fact-checked

A loss of stock claim is found in three stages. First, build a memorandum trading account to estimate stock on the date of fire. Second, deduct salvage to get the loss. Third, apply the average clause if the policy amount is less than the stock value, and cap the claim at the policy amount.

Understand Loss of Stock Claim Computation

When a fire destroys the stock, the books are usually not up to date and the closing stock cannot be counted. So you estimate it. The tool is the memorandum trading account. It is prepared only for working. It is not part of the ledger.

The period runs from the last stock-taking date (the last balance sheet) to the date of fire. On the debit side you put opening stock, purchases and direct expenses. On the credit side you put sales and the gross profit at the usual rate. The balancing figure is the stock on the date of fire.

Some items need adjustment. Purchases and sales are taken net of returns. Goods sent on approval and not yet accepted, goods sold but not delivered, and abnormal items must be treated with care. The gross profit rate normally comes from past years. Gross profit is calculated on sales unless the question gives it on cost. If it is on cost, convert it first.

Stock on the date of fire is the gross loss. Deduct the salvage (value of stock saved, at its realisable value) to get the net loss of stock. Then compare the policy amount with the value of stock on the date of fire. If the policy covers less, the average clause applies and the insurer pays only a proportion of the loss. If the policy covers the full value, the claim is the whole loss, limited to the policy amount.

This topic covers only the stock claim. Loss of profit and the journal entries for the claim are separate topics.

Key rules to remember

Memorandum trading account balancing figure: Stock on date of fire = Opening stock + Net purchases + Direct expenses − Cost of goods sold; Cost of goods sold = Net sales − Gross profit. Use only the period from the last stock date to the date of fire.
Gross profit on sales: Gross profit = Net sales × GP rate on sales; If given as a % on cost, GP on sales = x ÷ (100 + x) of sales. For example, 25% on cost = 20% on sales.
Net loss of stock: Net loss = Stock on date of fire − Salvage; Salvage is taken at its value, not at cost, if the question says so.
Average clause: Claim = Net loss × Policy amount ÷ Value of stock on date of fire; Applies only when the policy amount is less than the stock value. Otherwise claim = net loss, limited to the policy amount.
Claim cap: Claim ≤ Policy amount; The insurer never pays more than the sum insured.

How to solve Loss of Stock Claim Computation questions

Use this order for any fire-loss stock question. Keep the working neat, since step marks are given for each stage.

1Note the last stock date, the date of fire, the policy amount and the GP rate. Convert a GP on cost to a GP on sales.
2Prepare the memorandum trading account for the period. Show opening stock, purchases, direct expenses, sales and GP.
3Adjust sales and purchases for returns, goods on approval, goods sold but not delivered, and any abnormal items the question gives.
4Find the balancing figure. This is the stock on the date of fire.
5Deduct salvage to get the net loss of stock.
6Check the average clause. Compare the policy amount with the stock on the date of fire.
7If it applies, compute the claim as net loss × policy ÷ stock. If it does not, claim the net loss, limited to the policy amount.
8State the final claim clearly, and add the loss borne by the business if asked.

Quickest way: One-column cost-of-sales shortcut

When to use it: Use when the question gives clear figures and a straight GP rate, and there is no time to draw a full two-sided account.

Compute net sales, then cost of sales = net sales × (100 − GP%).
Stock at fire = opening stock + net purchases + direct expenses − cost of sales.
Subtract salvage.
Check the average clause: if policy ≥ stock, stop. Claim = net loss, limited to policy.
Still show a short account layout if the question asks for one. The shortcut is for checking, not for skipping the format.

Common mistakes in Loss of Stock Claim Computation

Applying the GP rate to purchases or to cost when it is given on sales.
Students see a percentage and apply it to the nearest figure.
Fix: Write whether the GP is on sales or on cost before you start. Convert it to a rate on sales.
Using the whole year's figures instead of the period from the last stock date to the fire.
The trial balance shows full-year totals and students copy them.
Fix: Subtract or adjust to isolate the period. Draw the timeline first.
Applying the average clause when the policy amount is higher than the stock.
Students apply the formula mechanically.
Fix: Compare first. The clause bites only when the policy is lower than the stock value.
Ignoring abnormal items such as goods on approval, goods taken by the proprietor, or goods sold but not delivered.
These appear as side notes in the question.
Fix: List each side note and decide if it changes sales, purchases or opening stock. Adjust before finding the balancing figure.
Applying the average clause before deducting salvage, or forgetting salvage altogether. Salvage is deducted first to get the net loss, and then the average clause is applied to that net loss.
Students are unsure of the order.
Fix: Find stock at fire, deduct salvage to get the net loss, then apply the average clause on that net loss.
Paying a claim above the policy amount.
The cap is forgotten after a long computation.
Fix: Finish by writing: claim = lower of the computed claim and the policy amount.

Worked examples

Example 1

A fire on 15 September 2026 destroyed the godown of Sharma Traders. Stock on 1 April 2026 was ₹2,40,000. From 1 April to 15 September, purchases were ₹8,10,000, purchase returns ₹10,000, sales ₹11,50,000 and sales returns ₹50,000. The GP rate is 25% on sales. Stock saved was valued at ₹30,000. The policy is for ₹1,50,000. Compute the claim.

Show the solution

Net purchases = 8,10,000 − 10,000 = ₹8,00,000.
Net sales = 11,50,000 − 50,000 = ₹11,00,000.
GP = 25% × 11,00,000 = ₹2,75,000.
Cost of goods sold = 11,00,000 − 2,75,000 = ₹8,25,000.
Stock at fire = 2,40,000 + 8,00,000 − 8,25,000 = ₹2,15,000.
Net loss = 2,15,000 − 30,000 = ₹1,85,000.
The policy (₹1,50,000) is less than the stock (₹2,15,000), so the average clause applies.
Claim = 1,85,000 × 1,50,000 ÷ 2,15,000 = ₹1,29,070 (approx.).
This is below the policy amount, so the cap does not bite.

Answer: Stock on the date of fire is ₹2,15,000 and the claim is about ₹1,29,070.

Example 2

Mehta & Sons has a stock policy of ₹4,00,000. A fire on 20 January 2027 destroyed stock. Stock on 1 January 2027 was ₹1,20,000. Purchases from 1 to 20 January were ₹3,00,000 and sales were ₹4,20,000. The GP is 20% on cost. Goods costing ₹10,000 were sold and invoiced but not yet delivered, and are included in sales. The goods are in the godown and were destroyed. Salvage is ₹15,000. Compute the claim.

Show the solution

GP on cost 20% = 20 ÷ 120 = 1/6 of sales.
Sales for the account must exclude goods invoiced but undelivered, since they were still in stock at fire. Their invoice price is ₹10,000 × 120 ÷ 100 = ₹12,000.
Adjusted sales = 4,20,000 − 12,000 = ₹4,08,000.
Cost of goods sold = 4,08,000 × 100 ÷ 120 = ₹3,40,000.
Stock at fire = 1,20,000 + 3,00,000 − 3,40,000 = ₹80,000.
Net loss = 80,000 − 15,000 = ₹65,000.
The policy (₹4,00,000) exceeds the stock (₹80,000), so the average clause does not apply.
Claim = net loss = ₹65,000, which is below the policy amount.

Answer: Stock at fire is ₹80,000 and the claim is ₹65,000.

Exam tips

Draw a short timeline of the last stock date and the date of fire. It stops you from using full-year figures.
Write the GP basis (on sales or on cost) at the top of your working. This single line prevents the most common error.
Read every side note in the question. Abnormal items nearly always change one figure in the memorandum account.
Show the average clause comparison in words, such as 'policy is more than stock, so no average'. It earns a step mark even when the clause does not apply.
In MCQs, test the average clause first. If the policy is not lower than the stock, the claim is just the net loss.

Practice questions from Insurance Claim for Loss of Stock and Loss of Profit

Loss of Stock Claim Computation: frequently asked questions

What is a memorandum trading account in a fire loss problem?

It is a working account drawn up only to estimate the stock on the date of fire. It runs from the last stock date to the fire and uses the usual gross profit rate. It is not entered in the books.

When does the average clause apply to a stock claim?

It applies when the policy amount is less than the value of stock on the date of fire. The insurer then pays only the proportion that the policy bears to the stock value. If the policy is equal or higher, the whole net loss is paid, up to the policy amount.

How do I treat salvage in a loss of stock claim?

Deduct the value of the stock saved from the stock on the date of fire to get the net loss. Then apply the average clause to the net loss if it is required.

How do I convert GP on cost to GP on sales?

If the GP is x% on cost, then GP on sales is x ÷ (100 + x) of sales. For example, 25% on cost is 20% on sales. Always convert before building the account.