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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Goods costing Rs 15,000 were destroyed by fire, and the insurance company admitted a claim of Rs 10,000. How should the loss be treated in the final accounts of the sole proprietor, assuming purchases were already recorded?

The cost of Rs 15,000 is credited to the Trading Account (purchases) so that it does not inflate cost of goods sold. The admitted claim of Rs 10,000 is shown as a current asset, and the uncovered balance of Rs 5,000 is charged to Profit and Loss Account as a loss.

  1. ACredit Purchases (Trading Account) with Rs 15,000, and debit Profit and Loss Account with the net loss of Rs 5,000 after the claim receivable of Rs 10,000 is recognisedCorrect
  2. BDebit Drawings Account with Rs 15,000
  3. CDebit Profit and Loss Account with Rs 15,000 only and ignore the claim
  4. DCredit Closing Stock with Rs 10,000 only

Explanation

The goods lost are removed from the trading account by crediting purchases with Rs 15,000. The claim admitted of Rs 10,000 is a current asset (claim receivable), and the balance Rs 5,000 is the abnormal loss charged to Profit and Loss Account. Option C ignores the admitted claim, so it overstates the loss.

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