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Monday, February 1, 2010

Accounting for Stock Destroyed, Stolen or Lost

When unknown quantity goods is lost, whether they are stolen, destroyed in a fire, or lost in any other way such that the quantity lost cannot be counted, then the cost of the goods lost is the difference between:
  • The cost of goods sold
  • Opening stock of the goods plus purchases less closing stock of the goods

When stock is stolen, destroyed or otherwise lost, the loss must be accounted for somehow. Since the loss is not a trading loss, the cost of the goods lost is not included in the trading account.

The account that is to be debited is one of two possibilities, depending on whether or not the lost goods were insured against the loss.

  • If the lost goods were not insured, the business must bear the loss, and the loss is shown in the profit and loss account.
    Profit and loss account – Debit
    Trading account – Credit
  • If the lost goods were insured, the business will not suffer a loss, because the insurance will pay back the cost of the lost goods. This means that there is no charge at all in the profit and loss account, and the appropriate double entry is:
    Insurance claim account – Debit
    Trading account – Credit

    The insurance claim will then be a current asset, and shown in the balance sheet of the business as such. When the claim is paid, the account is closed by,
    Cash – Debit
    Insurance claim account – Credit


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