Live Course on Drafting of Appeal and Reply of Penalty Notice by CA Sachin Sinha. Register Now!!

Accounting treatment

Rahul jain (LEARNING & TEACHING) (435 Points)

13 March 2014

gud mrng frnds...

There two Co.

Co. p purchase goods(raw material) from co, S. the invoice genreated by S is seprately showing the insurance amount and added in purchase price of goods. Co. P account for the total amount (purchase price + insurce charge) in its purchase account. is this correct treatment???

and if any accident place in transport than which co. have the right to claim the amount and why?

plz reply me soon....

Reply
Follow
Share

8 Replies

Manoj Mehta (Head Of Department (Accounts & Finance)) (1479 Points)
Replied 13 March 2014

Dear Rahul please first refer to purchase order conditions. If in the conditions it is mentioned that the amount of insurance is to be taken by the selling company then the same will be an expense in the hands of seller and if any damage occure the benefit will be available to seller . Journal entry will be (in comp s) comp p dr. ***** insurance expenses dr. *** to sales credit cr. **** secondly when the amount is paid on behalf of purchaser and reimburement made to company s then the entry. comp p dr. ***** to sales cr. **** to insurance charges cr. **** I hope ans is clear to you. Regards

SIVARAMAKRISHNAN P.G (CA final student) (129 Points)
Replied 13 March 2014

Rahul jain (LEARNING & TEACHING) (435 Points)
Replied 13 March 2014

dear manoj i got ur point but there is no such agreement or no terms and conditions.

simply just selling company sells the goods and showning the insurance amount in its invoice and the purchase comapny just take whole amount as purchase price and made the entry this....

purchase A/c......dr.

to cash (credit) as the case.. cr....

no different entry is made for insurace exp. amount...

in this case can the purchase comapny claim the benifit of insurace as it is paying the insurace amount to selling comapny..????

and plz suggest what should be correct treatment if no agreement or terms and conditions between the two companies...??????

Saji John (Finance Manager) (26 Points)
Replied 14 March 2014

The accounting entry is perfect, you have to include the insurance expenses as cost of purchase i.e. raw material.

God forbids if the accident take place, you can claim the amount from insurance directly if you have the insurance policy with you. If not then you have to approach the seller to claim on your behalf. Most of the case the insurance policy is in the name of the seller (insurer) so the insurer can only claim for the damages. Hope this clarifies your query.

Rahul jain (LEARNING & TEACHING) (435 Points)
Replied 15 March 2014

@ Mr.john sir-

i gor ur point but one doubt is still in my mind that the seller sales goods including insurance amt. and if any accident take place then the seller get the benifit and purchaser can recover the amt. from seller (As u said) but if seller ignores to him then what is the legal remedy with purchaser???? can he sue the seller????

CA. Mayur (Service) (147 Points)
Replied 16 March 2014

I understand from the question, that insurance is in repect of damage of goods during the transit. hence buyer will not make payment of goods to seller only on safely delivery of goods. In case if insurance is after the goods are delivered then it will form part of AMC, so buyer may not make payment of services. Further buyer can take legal proceedings for losses incurred due to non delivery of goods provided the same is explicitly stated in agreement

Saji John (Finance Manager) (26 Points)
Replied 18 March 2014

Mr Mayur has given you the reply aptly, if the payment towards goods purchased is not made well in advance, you can hold the payment for the loss, but if you have made an advance payment (100%) then you can sue the seller for non receipt of the goods. Hope this clarifies your query