Page 75 - Accountancy_F5

Under-Insurance; is the situation where the sum insured is less than the actual value
of the insured item. For example, when the sum insured is lower than the value of the
inventory that was present prior to an accident. When inventories are under-insured, the
insurance claim will be determined based on an average clause. An average clause is a
provision in an insurance policy that requires the insured to bear a portion of the loss if
the item was underinsured.
FOR ONLINE READING ONLY
If there is an average clause, the insurance claim will be calculated as follows:
Loss of inventory can be determined by using the following formula:

Sum insured
Insurance claim = # Actual loss
Inventory value at the date of accident
LANGUAGE EDITING
Amount of inventory on the date of accident xx

Less: Amount of salvaged inventory xx
Amount of inventory loss xx

If there is no average clause then insurance claim will be the lower of actual loss and
sum insured.
Note: The term “inventory value at the date of accident” is used in this book to refer
to the value of inventory just before the occurrence of accident on the date of
accident.

Example 2.13
Juma prepares accounts on 30 September each year. On 31 December 2023 fire
th
st
destroyed a greater part of his inventory. The following information was collected
from his books:

Details TZS
Inventory on 1 October 2023 3,600,000
st
Purchases from 1 October – 31 December 2023 8,500,000
st
st
Sales from 1 October – 31 December 2023 11,800,000
st
st
1
The rate of gross profit is 33 3 % on cost. Inventory to the value of TZS 300,000 was
salvaged. Insurance policy was for TZS 2,500,000 and claim was subject to average
clause.

Additional information:
(a) Inventory at the beginning was calculated at 10% less than cost.
(b) Purchases include the purchase of the plant for TZS 500,000

Required: Calculate the claim for the loss of inventory.

Student’s Book Form Five
62

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