Procedure of calculating loss of profit

Many commerce students are confused about how to calculate loss of profit. They know that businessman can take loss of profit, due to dislocation of business after fire to concern . It can also take with fire insurance policy. But for getting claim , the businessman want to calculate exact loss of net profit from the date of fire to that day in which business becomes normal .

Steps of calculating loss of profit

Ist step

Calculate gross profit ratio:-

As the starting point of this procedure you have to determine the value of gross profit because loss of profit is easy to calculate by multiplying Gross profit with short of sale in that disturbance period .
Net profit xxxx
Add Insured standing
Charges of lass year (+) xxxx
Gross profit of last year xxxx

Gross profit ratio = Gross profit / sale of last year X 100

2nd step

Calculate shortage in sale due to loss of fire

Actual sale of same period of loss xxxx
Add any increase in thrend of sale (+)xxxx
Less actual sale in dislocation period (-) xxxx
Shortage of sale in dislocation period xxxx

3rd step

Calculation of loss of profit

Loss of profit = shortage of sale X G.P. rate / 100

4th Step

Total amount for claim of loss of profit

Loss of gross profit xxxx
Add increase in cost of working (+) xxxx
Less saving in standing charges
Amount of claim xxxx

5th step

Apply average clause

Amount of claim = policy value / amount to be insured

Important notes

1. We will use of only less rate from following rates for calculating correct amount of loss pf profit
Net profit + Insured standing charges of last accounting year
-------------------------------------------------------------------------- X 100
Sale for the last accounting year

Policy value / sale of 12 months immediately proceeding fire as adjusted for trend .

2. The Indemnity period or dislocation period which will small, that period will be fixed for calculation of claim .
3. We will calculate loss of sale on the base of future trend of sale.
4. Insured standing charges means all expenses which are mentioned in the policy of loss of profit. Businessman wants to get these expenses in the case of mishappening. We can make its list

  • Traveling expenses
  • Rent, rate and taxes not related with profit of business
  • Advertising
  • Interest on debentures and loans.
  • Auditors fee
  • Salaries of permanent staff
  • Directors’ fee
  • Salaries of permanent staff
  • Wages of skilled workers
  • All not described expenses must not more than 5% of described standing expenses .

    Explanation with example

From the following information, find out the claim under loss of profit policy :-

2007 – net profit for the year $ 10000
2007- Standing charges insured $ 6000
$ sales for 2007 $ 160000
Date of fire 1.1.2008
Period of dislocation 3 months
Sales from 1.12007 to 31.3.2007 $ 54000
Sales from 1.1.2008 to 31.3.2008 $ 19400
Indemnity period 6 months
Policy subject to average clause $ 11000
Trend in annual sales 10% increase


Ist step

Calculation of gross profit ratio

Net profit + Insured standing charges of last yea
----------------------------------------------------------- X 100
Sale of last year

---------------------- X 100
= 10%

2nd step

Shortage of sale

Last year’s sale from 1.12007 to 31.3.2007 $ 54000
Add 10% for upward trend $ 5400
$ 59400
Less actual sale during dislocation period $ 19400
Shortage of sale $ 40000

3rd step

Calculate of loss of profit

Loss of sale X G.P. rate /100
40000 X 10/100 = 4000

4th step

Total amount for claim of loss of profit

Loss of gross profit 4000
Add increase in cost of working (+) nil
Less saving in standing charges nil
Amount of claim $4000

5th step

Average clause

Since the policy is subject to average clause, it is necessary to find out whether expected profit of the current year was fully insured or not .

Expected sale for current year

Last year sale $ 160000
Add :Increase in current year 10% = $ 16000
Total sale of current year = 176000
Profit rate 10%
The profit of current year = 176000 X 10% = $17600

But we take the policy of $ 11000

This is a case of under insurance. It means insurance company pays $ 110 of every $ 176 loss

Claim = insurance policy / insurable profit X profit lost
= 11000 / 17600 X 4000 = $ 2500

So , amount of claim would be $ 2500

Read Also


Comments on this Website
Share above Content to Your Friends


access account accountant Accounting accounting definitions accounting ebook Accounting education accounting procedure accounting process outsourcing Accounting Software advance advertising africa Amalgamation amendments announcements Annuity assets audit auditing Australia B.Com. balance sheet bank Bank reconciliation banking basic accounting BBA benefits best bill black money blog bloggers book keeping bookkeeping Branch Accounting - full tutorial budget Budget variance business businessman CA calculator canada capital capital budgeting career cash cash book cash flow statement Chiense children china class coaching coins college commerce commerce students company computer computer accounting conference Contact vinod kumar corporate accounting cost cost accounting cost center cost centre CPA credit credit card cs currency data Debit and credit debit cards debt debtor degree depletion depreciation documents dollar domain Downloads Dubai e-accounting earning education Education Loans email employee EPF ERP euromoney examination excel excise duty expenses facebook factor of loan fans feature fifo FII fiji finacle finance Financial financial accounting fire insurance flickr flow forensic forex formula france fraud free fun function fund GAAP GDP gdr germany gold goodwill goodwill accounting google google apps google apps google base google buzz google calendar Google docs google finance google fusion tables google talk govt. GST guide health Hindi Hindi Language history holding company How to treat FBT in Tally 9 HRA ICAI ICAWI ICICI Bank IFRS income income statement Income Tax India indian railway Indonesia inflation inflation accounting infographics information inspiration insurance insurance accounting interest international Internet Introduction of Tally 9 inventory investment invoice IT Japan Job costing journal entries Kalculate keyboard kindle kuwait laptop law LBT learning lease lecture ledger leducation Leverage Analysis liabilities lifo linkedin loan logical point loss loss of profit M.Com. m.phil malaysia management accounting manual accounting manufacturing account market marketing mastercard material MBA MCA media migration mobile money ms word ms. excel multi currency in tally 9 Multicurrency Accounting mutual fund national security new and sacrifice ratio new york times new zealand news NGO nonprofit-accounting North Georgia Mountains NPV NSE odbc office oman online application online accounting otcei pakistan parents pay pal pdf pie chart pie chart of income pnb podcast ppf presentation price privacy policy prize money prof. vinod kumar profit profit and loss account project management provision purchase puzzles quickbooks Quote quotes quotes of svtuition rating agency ratio analysis RBI readers real estate rectification of errors remote control reports reserves responsibility accounting retirement revenue Revenue reserves review risk rupees salary sale saudi arabia saving sbi scholarship school SEBI security service tax share share trading Shares shri lanka singapore sms social accounting society solution South Africa stock stock exchange structure student students study subsidiary company svtuition swiss bank tally tally 9 Tally 7.2 Tally 9 Tally.ERP 9 tanzania tax Tax Accounting TDS teacher teaching technology test testimonial testimonials thailand tips trading trading on equity transaction trend trial balance tuition twitter UAE UGC - NET Commerce UK United Arab Emirates university usa valuation VAT Video Voucher and vouching wikipedia working capital youtube
Accounting Education: Procedure of calculating loss of profit
Procedure of calculating loss of profit
Accounting Education
Not found any lecture VIEW ALL Readmore Reply Cancel reply Delete By Home PAGES Lectures View All RECOMMENDED FOR YOU Category ARCHIVE SEARCH ALL Lectures Not found any lecture match with your request, please help to write it and send it to our email at for making this website free accounting and finance encyclopedia. Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS CONTENT IS PREMIUM Please share to unlock