Question 1 (d)

Abnormal loss of stock and the insurance claim in branch accounts

5 marks

Time to write: About 10 minutes

From an older CBCS paper

Question

Question 1 (d) · 5 marks

Q.1 (d) In branch accounting, how will you deal with an abnormal loss of stock and the insurance claim under (i) the debtors method and (ii) the stock and debtors method? [5 Marks]

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

10 minfor 5 marks

Write it in this order

Read; underline the asks; jot your points 1 min
1 Meaning of abnormal loss 1 mark 1 min
2 Debtors method 2 marks 4 min
3 Stock and Debtors method 2 marks 3 min
Check: every ask answered, key terms underlined 1 min

123

Easy marks

Meaning of abnormal loss (step 1, 1 mark): a definition in one or two lines. It opens the answer, so it takes a minute or two.

Short on time? Keep step 1 short. Trim steps 2 and 3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 10 minutes for 5 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

An abnormal loss is a loss of stock from abnormal causes such as fire, flood, theft or accident (as distinct from a normal loss inherent in the goods). It is removed from the branch's trading result so that the gross profit is not distorted, and its cost, less any insurance claim, is charged as a loss.

(i) Debtors method

The Branch Account is a nominal account in which the stock at the end is entered at what is actually in hand, so the goods lost are simply missing from the closing stock; the loss is adjusted as follows:

Goods lost at cost (removing the loading if goods are invoiced above cost): Branch Account is credited with the value of the goods lost (Abnormal Loss / Goods Lost A/c Dr, To Branch A/c), so the branch profit is not reduced by it.
Insurance claim admitted: Insurance Company (Claim) A/c Dr, To Abnormal Loss A/c.
Net loss (value lost less claim): General Profit and Loss A/c Dr, To Abnormal Loss A/c.
When the claim is received: Bank A/c Dr, To Insurance Company A/c.

(ii) Stock and Debtors method

The goods lost are credited to the Branch Stock Account at invoice price, split as follows (entry 10):

Entry	Debit	Credit
Goods lost	Branch Adjustment A/c (loading); Branch Profit and Loss A/c (cost)	Branch Stock A/c (invoice price)
Insurance claim admitted	Insurance Company A/c	Branch Profit and Loss A/c
Claim received	Bank A/c	Insurance Company A/c

So the loading is cancelled in the Branch Adjustment Account, the cost of the goods lost is charged to the Branch Profit and Loss Account, and the claim (received, or admitted but not received) is credited there, leaving the net loss in the branch's net profit. (A normal loss, by contrast, is charged in full at invoice price to the Branch Adjustment Account and absorbed in gross profit (entry 11).)

Where the 5 marks sit

#	Component	Marks
1	Meaning of abnormal loss	1
2	Debtors method	2
3	Stock and Debtors method	2
	Total	5

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