CA. Sir B.K.

Shah

Dr. (CA.) Sushma Shah It is always a good idea to first understand the various ways loss and theft of cash and other non cash assets take place and then go into the intricacies of its accounting treatment. We have taken every care to explain things in toto; however readers are cautioned to be judicious before acting upon this guidance note. This article is protected by copyright; hence unauthorized publication is subjected to legal consequences.

Article Index: 1) 2) 3) 4) Abnormal loss of stock. Accounting for losses with or without insurance claims Types of other thefts and frauds. Accounting entries to disclose thefts and frauds in the books of account 5) Timing of reporting- AS 4 (revised) Contingencies and Events occurring after the balance sheet date. 1. Abnormal loss of stock

Abnormal loss of stock

Loss due to theft, fire or other natural calamity

When stock is fully insured

When stock is partially insured

When stock is uninsured

Abnormal Loss of stock can take two forms: 1. loss due to fire 2. Loss due to theft.

The most important thing in this is how to record the same in the books of account. In this connection two important points need consideration: 1. The loss of stock should be valued at cost and not at market price. 2. The closing stock should be valued at cost after the considering the loss i.e. the closing figure should be net of loss.

2. Accounting Entries for losses with or without insurance claims: When stock is fully insured and full claim is accepted at cost price:
1. Entry when loss takes place Insurance claim Dr.

To loss of stock a/c 2. When loss of stock is transferred to trading account ( at cost) Loss of stock Dr.

To trading Account United India Ins co. ltd To Insurance Claim a/c Dr.

3.

When claim is lodged with the insurance company say united India insurance company limited

When stock is partially insured and claim is partially accepted:

1. Entry when loss takes place Insurance claim Dr.

Loss of stock not recoverable Dr. To loss of stock a/c

2. 3.

4.

When loss of stock is Dr. transferred to trading To trading Account account When claim is lodged with United India Ins co. ltd Dr. the insurance company To Insurance Claim a/c say united India insurance company limited The loss not recoverable is Profit and loss A/c Dr. transferred to profit and To Loss of stock not recoverable a/c loss account

( at cost) Loss of stock

When stock is uninsured:

1. Entry when loss takes place Loss of stock not recoverable Dr. To loss of stock a/c 2. When loss of stock is transferred to trading account ( at cost) Loss of stock Dr.

To trading Account Profit and loss A/c Dr. To Loss of stock not recoverable a/c

3.

The loss not recoverable is transferred to profit and loss account

Depiction in Trading and profit loss account and Balance Sheet: CASE STUDY 1 stock fully insured and claim fully accepted
Q1: Ziana Healthcare Pvt. Limited, Lucknow manufactures and markets medicines. On 15th Oct 2008 fire broke out in one of its godowns and stock worth Rs. 15000.00 was destroyed. The market value of the stock was Rs. 37,500.00 only. The company has its stock fully insured and the insurance company (united India Insurance Co. ltd) has accepted to pay Rs. 15000.00 towards loss of stock. Ramakant desai, the companys accountant is in a fix as to how to record these transactions in the books of account of the company. Kindly help him to prepare trading and profit and loss account and Balance sheet for the above period. Other details are as follows: Opening stock: 190000 Purchases: 15, 00,000 Sales: 23, 36,000.00 Closing stock (before adjusting loss): 2, 30,000.00 TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.3.2009 Ziana Healthcare Pvt. Ltd. Particulars To Opening Stock To Purchases To Gross profit Total Amount 1,90,000.00 15,00,000.00 8,76,000.00 25,66,000.00 Particulars By Sales By Loss of Stock By closing Stock Total Amount 23,36,000.00 15,000.00 2,15,000.00 25,66,000.00 Loss of stock valued at cost

Closing stock at cost after loss

BALANCE SHEET EXTRACT AS ON 31.3.2009 Ziana Healthcare Pvt. Ltd. LIABILITIES CAPITAL Amount ASSETS FIXED ASSETS CLOSING STOCK UNITED INDIA INSURANCE CO. LTD. Amount 2,15,000.00 15,000.00

3. Other types of thefts and frauds

Other

types of thefts

Cash theft

Theft of other non cash items like stationery items etc.

Fraudulent disbursements

Larceny

Skimming

Misuse of items

Stealing of items

Obtaining fraudulent invocing, checks etc.

Obtaining inflated invoices, checks etc.

a) Cash theft Theft of cash can be classified into two groups:

I) II)

Skimming; Larceny.

The distinction between the two lies in the timing larceny is the theft of cash that the company has already accounted for, and skimming is the pocketing of money before the company has the opportunity to account for it. Perceptibly, skimming will be trickier to identify because there is no direct audit trail. Skimming can occur through
I) II) III)

Unrecorded sales (cashiers or accountants put cash in their pockets and not properly record them in the cash book), Understated sales (have the customer pay full price, then enter a discounted sale in the accounting records), and Theft of funds from incoming mail or receipts. Cash businesses are more prone to skimming than businesses paid by check, credit card, or electronic transfers. Checks that are being methodically stolen are frequently deposited in false company accounts that have a similar name but belong to the thief, not the company.

Effects of skimming: Skimming will always cause overstatement of other assets, either accounts receivable or inventory. If the skimmer has access to accounting records and can adjust the overstated accounts, the adjustment will usually manifest itself in a rise of cost of goods sold and lower than expected margins. Cash larceny will be detectable if the accounting records are appropriately maintained and analyzed. The larceny occurs at the

points in the business where there is cash, usually at the cash counters, the check deposit counters, or deposits in transit. Cash larceny should become apparent during cash register or bank account reconciliation procedures, and then the question becomes, Who did it and where are they now? b) Non-cash assets There are two ways to misappropriate a non-cash asset
I) II)

Steal it or Misuse it.

Stealing of inventories and other items: The theft of inventories or assets is as critical as theft of cash. Theft of inventory will manifest (noticeable) as overstated accounts receivable if the thief manipulates sales documents, or inventory shrinkage and lower gross margins if the inventory is just taken. The theft of assets can take place in the form stealing of stationery items, computer parts etc. Misuse: Company cars, Stocks, telephones, computers, office equipment, and supplies are often the items most misused. Often these will occur in conjunction with theft of time (doing personal shopping on the Internet or running a business on the side during work hours). Misuse of company assets is usually immaterial, and some businesses even consider it a perk of employment. Material misappropriation can often be detected by reviewing long-distance phone bills, copy machine meters, supply usage, Internet access, etc. c) Fraudulent disbursements Fraudulent disbursements generally look just like legitimate company activity, and can include: 1. forged checks, 2. false invoices or expense reports, 3. false timecards,

4. ghost employees or 5. vendors, 6. fraudulent or overstated refunds or credit memos, 7. false voids, 8. overstated commissions, 9. Unauthorized use of company credit cards or telephones, 10. Kickback schemes, etc. How it is perpetrated: The thief in this case uses a lawful company function for an illicit purpose. Forgeries usually engage changing a name on the payout, the amount of the payout, the destination of the payout, or the authorizing signature. More elaborate schemes include the forgery of documentation that supports the disbursement. CASE STUDY 2 CASH theft and insurance claim fully accepted.
Q1: LIFECOM PHARMACEUTICALS INDIA Pvt. Limited, MUMBAI manufactures and markets medicines. On 15th Oct 2008 the cashier of the company Keith Johnson found that the cash safe of the company was broke open by burglars to steal cash Rs. 2, 00,000.00. The company had its cash chest fully insured and the insurance company (united India Insurance Co. ltd) has accepted to pay Rs. 2, 00,000.00 towards loss of cash. The companys accountant is in a fix as to how to record these transactions in the books of account of the company. Kindly help him to prepare journal entries, trading and profit and loss account and Balance sheet for the above period. Other details are as follows: Opening stock: 190000 Purchases: 15, 00,000 Sales: 23, 36,000.00 Closing stock: 2, 30,000.00 CASH IN HAND 2, 00,000.00 (BEFORE THEFT) SALARY AND OTHER EXPENSES: 4,25,000.00

JOURNAL ENTRY: 1. Entry when loss takes place LOSS OF CASH To CASH a/c 2. When claim is lodged with the insurance company say united India insurance company limited United India Ins co. ltd To LOSS OF CASH a/c Dr. Dr.

TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31.3.2009 LIFECOM PHARMACEUTICALS INDIA Pvt. Ltd. Particulars To Opening Stock To Purchases To Gross profit Total TO SALARY AND OTHERS TO NET PROFIT TOTAL Amount Particulars 1,90,000.00 By Sales 15,00,000.00 8,76,000.00 By closing Stock 25,66,000.00 Total 4,25,000.00 BY GROSS PROFIT 4,51,000.00 8,76,000.00 BALANCE SHEET EXTRACT AS ON 31.3.2009 LIFECOM PHARMACEUTICALS INDIA Pvt. Ltd LIABILITIES CAPITAL Amount ASSETS FIXED ASSETS CLOSING STOCK UNITED INDIA INSURANCE CO. LTD. CASH IN HAND Amount Amount 23,36,000.00 2,30,000.00 25,66,000.00 8,76,000

8,76,000.00

2,30,000.00 2,00,000.00 0

CASE STUDY ON FRADULENT DISBURSEMENTS AND SKIMMING COMBINED: In this type of fraud the Cashier or Accountant: 1. firstly issues fake invoices in the name of the company and; 2. Then obtains checks and deposits them into a fake account operated by him. 3. The effect of this type of fraud is that stock is actually reduced but neither sale is recorded nor cash is received. 4. The moot point is that whether sale should be recognized in the books of the company when there is actually no sale (on detection of the fraud). 5. in our opinion the following should be the correct procedure for accounting the above transactions:
Sl. No. 1 Effect The sale should not be recognized upon detection, because AS 9 Para 11 clearly states that the sale is to be recognized upon transfer of goods by the seller to the buyer and no significant uncertainty exits regarding ultimate collection of the consideration Effect on The closing stock should not stock be adjusted to bring to it current value because it will be adjusted only when the sale is recognized Effect on There will be no effect on gross profit gross profit Effect on No VAT is payable until the VAT sale is recognized When sale to Only when there is a court be order in the favor of the recognized company and the collection of sale consideration is Particulars Effect on sale entry Fraudsters a/c... Dr To Stock Mis appro. A/c (the transaction should be valued at its market value at the time of fraud)

2.

No entry

3. 4. 5.

No entry No entry Stock Mis. App a/c.. Dr. To sale a/c

6.

Suppose the court orders to cut down the sale value to 75% then what to do

confirmed. Reverse the 25% sale value and then recognize the sale

Stock mis app A/c.Dr To Fraudster a/c (25% value reversed) Stock Mis. App a/c.. Dr. To sale a/c (recognize 75%) sale value)

7.

Suppose court gives verdict against the company and the fraudster is set free then what to do

Bring the original entry at cost and then transfer the fraudster a/c to profit and loss a/c

Stock mis app A/c..Dr To Fraudster a/c (reverse values to bring accounts at cost) Stock Mis. App a/c ..Dr. To trading a/c (recognize loss of stock in the trading account) Profit and loss a/c Dr. To Fraudster a/c

FAQs: Q1: why are you not adjusting the stock in hand when the fraud has been detected and the actual stock in hand is less than the one disclosed in the books? A1: you must view things globally; physical stock in less in my hands but rest is held by the fraudster in his account, which is actually mine, hence when we take view in toto, the stock is full as disclosed in the books Q2: we can also adjust things in a different manner like this: Adjust the stock to physical value in hand and debit the fraudster. This way there will be no need to recognize the sale. A2: your point will be valid only when the stock is stolen and the thief is not traceable, then we adjust the stock and recognize the loss. In this case the amount has to be recovered from the fraudster who is well recognized. Thus until and unless we do not raise the full amount of claim against him in our books we cannot fight a case against him.

5. Timing of reporting- AS 4 (revised) Contingencies and Events occurring after the balance sheet date. Consider the following examples for understanding the concept:
I)

In X Co. Ltd., theft of cash of Rs.5 lakh by the cashier in January, 2009 was detected only in May, 2009. The accounts of the company were not yet approved by the Board of Directors of the company. Whether the theft of cash has to be adjusted in the accounts of the company for the year ended 31.3.2009. Decide. Ans: AS per paragraph 13 of AS 4 (revised) Contingencies and Events occurring after the Balance Sheet Date; an event occurring after the balance sheet date may require adjustment

to the reported values of assets, liabilities, expenses or incomes. If a fraud of the accounting period is detected after the balance sheet date but before approval of the financial statements, it is necessary to recognize the loss amounting Rs. 5, 00,000 and adjust the accounts of the company for the year ended 31st March, 2009.