Goods Lost by Fire/Theft and Goods Distributed as Free Samples

Goods Lost by Fire or Theft

Meaning: goods forming part of the business's stock are destroyed or stolen during the year — an ABNORMAL loss, unrelated to normal trading, that must be kept OUT of the ordinary Gross Profit calculation.

Double effect, WITHOUT insurance (or where no claim is admitted):

1. Credited to the Trading Account at the FULL COST of the goods lost (this removes the lost goods from the cost of goods sold, since they were never actually sold).
2. The SAME full amount is debited to the Profit and Loss Account as a loss (since nothing is recoverable).

Double effect, WITH a PARTIAL insurance claim admitted:

1. Credited to the Trading Account at the full cost of the goods lost (exactly as above — this step never changes).
2. Only the unrecoverable portion (Cost of goods lost − Claim admitted) is debited to the Profit and Loss Account as a genuine loss.
3. The claim admitted amount is shown as a Current Asset ("Insurance Claim Receivable") in the Balance Sheet, since the insurer has agreed to pay it but has not yet done so.

Goods Distributed as Free Samples

Meaning: goods taken out of stock and given away free, as an advertising/promotional expense, rather than sold.

Double effect:

1. Credited to the Trading Account at cost (removes these goods from the cost of goods sold, since they were not actually sold for revenue).
2. Debited to the Profit and Loss Account as an Advertisement expense, at the same cost value (the business did genuinely incur this cost, just not through a cash sale).