A level-readyAll subjects · Accounting · WAC11 The Accounting System and Costing
Losses of inventory or cash
Edexcel IAL Accounting · WAC11 The Accounting System and Costing
When inventory is destroyed or stolen, or cash goes missing, the loss has to be calculated, usually from incomplete information, and recorded (spec 1.3.18).
Inventory lost: the gross profit method
1. Find cost of sales from sales to date using the margin (or mark-up).
2. Expected inventory = opening inventory + purchases to date - cost of sales.
3. Loss = expected inventory - inventory salvaged.
4. Any amount the insurer agrees to pay is an other receivable (debit Insurance company); the rest is an expense in the statement of profit or loss.
The goods lost are removed from cost of sales (credit Purchases or the trading account) so that gross profit is not distorted.
| £ | |
|---|---|
| Opening inventory | 18,000 |
| Purchases to date | 64,000 |
| Less Cost of sales (90,000 x 70%) | (63,000) |
| Expected inventory | 19,000 |
| Less Inventory salvaged | (2,500) |
| Inventory lost | 16,500 |
Cash missing
Rebuild the cash account: opening cash + cash received - cash paid out (banked, expenses, drawings) = expected closing cash. Compare with the cash actually counted. The shortfall is a loss (expense), or treated as drawings if the owner took it.
| £ | |
|---|---|
| Opening cash | 600 |
| Cash sales | 24,000 |
| Less Banked | (19,500) |
| Less Cash expenses | (2,100) |
| Less Drawings in cash | (1,800) |
| Expected closing cash | 1,200 |
| Cash counted | 400 |
| Cash missing | 800 |
Entries
- Inventory loss: debit Loss of inventory (expense) and/or Insurance company (receivable), credit Purchases (or Trading account).
- Cash loss: debit Loss of cash (expense), credit Cash.
Why it matters: managers should look at controls (security, reconciliations, separation of duties) to prevent repeat losses.
Worked example
A fire destroys inventory. Opening inventory £18,000; purchases £64,000; sales £90,000 at a 30% margin; goods salvaged £2,500. The insurer pays 80% of the loss. Find the loss and the amount charged to profit.
- Cost of sales = 90,000 x 70% = 63,000.
- Expected inventory = 18,000 + 64,000 - 63,000 = 19,000.
- Loss = 19,000 - 2,500 = 16,500.
- Insurance claim = 80% = 13,200; charged to profit = 3,300.
Answer: Inventory lost £16,500; expense £3,300; insurance receivable £13,200.
Check yourself
- Opening inventory £12,000; purchases £45,000; sales £60,000 at a gross margin of 25%; nothing salvaged. Calculate the inventory lost.
Show answer
£12000. Cost of sales 45,000; expected inventory = 12,000 + 45,000 - 45,000 = 12,000.
- Opening inventory £8,000; purchases £30,000; sales £40,000 at a mark-up of 25%. Calculate expected closing inventory.
Show answer
£6000. Cost of sales = 40,000 / 1.25 = 32,000; expected inventory = 38,000 - 32,000 = 6,000.
- Opening cash £350; cash sales £18,200; cash banked £15,000; cash expenses £1,900; cash drawings £1,200. The cash counted is £180. How much cash is missing?
Show answer
£270. Expected cash = 450; missing = 270.
- Inventory costing £16,500 is destroyed. The insurer agrees to pay 80%. How much is charged as an expense?
Show answer
£3300. Uninsured 20%: 3,300.
- How is the amount the insurance company has agreed to pay, but not yet paid, shown at the year end?
- As income in the statement of profit or loss only
- As a reduction in capital
- As a current liability
- As a current asset (other receivable)
Show answer
As a current asset (other receivable). The insurer owes the business money.
- Why are the goods lost credited to Purchases (or the trading account)?
- To increase revenue
- So that cost of sales, and therefore gross profit, is not distorted
- To record the insurance claim
- Because the goods have been sold
Show answer
So that cost of sales, and therefore gross profit, is not distorted. The goods were not sold, so their cost should not be in cost of sales; the loss appears separately.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.