Accountancy · Ch 13 — Final Accounts of Sole Proprietors – II
Goods Lost by Fire/Theft and Goods Distributed as Free Samples
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):
- 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).
- 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:
- Credited to the Trading Account at the full cost of the goods lost (exactly as above — this step never changes).
- Only the unrecoverable portion (Cost of goods lost − Claim admitted) is debited to the Profit and Loss Account as a genuine loss.
- 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:
- Credited to the Trading Account at cost (removes these goods from the cost of goods sold, since they were not actually sold for revenue).
- 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).
The common thread …
Stock lost by fire/theft, credited to the Trading Account at full cost to exclude it from cost of goods sold; the unrecoverable portion (cost less any insurance claim admitted) is debited to the P&L Account, and any clai …