One should note that the average clause applies only where the insured value is less than the total cost and not vice-versa. The undermentioned points are relevant : (0) Where stock records are maintained and such records are not destroyed by fire, the value of the stock as at the date of the fire can be easily arrived at (ii) Where either stock records are not available or where they are destroyed by the fire the value of stock at the date of the fire has to be estimated. The usual method of arriving at this value is to build up a Trading Account as from the date of last accounting year. After allowing for the usual gross profit, the figure of closing stock on the date of the fire can be ascertained as the balancing item (iii) Where books of account are destroyed the task of building up the Trading Account becomes difficult. In that case information is obtained from the customers and suppliers have to be circularised to ascertain the amount of sales and purchases. (iv) After the insurance company makes payment for total loss, it has the same rights which the insured had over the damaged stock: These are subrogated to the insurance company. In practice, in determining the amount of the claim, credit is 58 given for damaged and salvaged stock. (v) Frequently salvaged stock can be made saleable after it is reconditioned. In that case, the cost of such stock must be credited to the Trading Account and debited to a salvaged stock account. The expenses on reconditioning must be debited and the sales credited to this account, the final balance being transferred to the Profit & Loss Account Illustration 1 On 12th June, 2006 fire occurred in the premises of N.R. Patel, a paper merchant. Most of the stocks were destroyed, cost of stock salvaged being Rs. 11,200. In addition, some stock was salvaged in a damaged condition and its value in that condition was agreed at Rs. 10,500. From the books of account, the following particulars were available. 1. His stock at the close of account on December 31, 2005 was valued at Rs. 83,500. 2. His purchases from 1-1-2006 to 12-6-2006 amounted to Rs. 1,12,000 and his sales during that period amounted to Rs. 1,54,000 On the basis of his accounts for the past three years it appears that he earns on an average a gross profit of 30% of sales. Patel has insured his stock for Rs. 60,000. Compute the amount of the claim