What is memorandum trading account?

In case of fire, Memorandum Trading account is required to find the value of estimated Stock. It is prepared with the help of Gross Profit ratio of the last year, Opening Stock, Purchase, Sale, and Direct Expenses.

Memorandum Trading Account (for Current Year)"In case of fire, Memorandum Trading account is required to find the value of estimated Stock. It is prepared with the help of Gross Profit ratio of the last year, Opening Stock, Purchase, Sale, and Direct Expenses.

Definition of the Special Memorandum Account (SMA): The Special Memorandum Account is a line of credit where the excess equity in the margin account is deposited, increasing the buying power of the shares on margin.

For traders, experts, and investors, the Special Memorandum Account is the one that confuses, and the term Special Managed Account (SMA) is frequently used equally with the Special Memorandum Account. The Special Memorandum Account is a separate account owned by the broker that functions similarly to a credit account.

The Special Memorandum Account account has two operating signals: a positive SMA and a negative SMA. A negative SMA is never a good sign for accounts. An investor must be aware of SMA to avoid a negative SMA account. Besides that, investors must also understand what happens in case of a negative SMA.

The Special Memorandum Account works:

The SMA is like credits. An investor can withdraw these credits from the SMA as cash to access more stocks (buy more of them), which will improve their purchasing power by allowing them to buy more stocks.

The Special Memorandum Account is crucial to observe, as well as its value because if it is negative, the broker will issue traders a margin call. A margin call is when a broker requests additional funds or assets from a client to cover losses and satisfy margin requirements.

The traders will be forced to sell some of their securities to meet the margin requirements, which is never a good thing in the investment world. Traders must also have a positive Special Memorandum Account in the amounts required to buy something new.

Here is an SMA account example, if traders want to buy some stock and the margin requirement is $100 or more, they need to have $100 or more in their account to make that trade happen. If traders do not have that in their Special Memorandum Account, they cannot make any more trades until they deposit more money or what has already been held value increases.

Many traders also frequently misunderstand Special Memorandum Account existence purposes.

The primary purpose of the Special Memorandum Account existence is to give extra buying power to the client’s margin account (brokerage account).

Jackson is a trader who purchases 1000 shares of SDF company at $50 per share on margin. In this example, what is SMA if the SDF company trades at $70 per share? Let us find out.

Jackson purchased $50,000 value shares (1000 * $50), and Jackson has to deposit Reg. (Regulation) T amount–50% of the purchase. Therefore $25,000 (50% * $50,000) goes under the customer equity (EQ) $25,000 (50% * $50,000) and Jackson has to borrow $25,000 on margin from the broker.

Now $70,000 ($70 * 1,000) implies the long market value (LMV). The borrowed amount from the broker does not change, and the $25,000—margin amount does not change.

Therefore, the EQ increases to $45,000 ($70,000 - $25,000 because the amount borrowed from the broker remains the same. When the new Regulation T margin requirement is multiplied by the LMV, we get the EQ value as ($70,000 * 50%) $35,000.

Two majorly affect the Special Memorandum Account balance—the purchase of securities and cash withdrawals from the brokerage accounts.

The investors can use the funds in the account to buy additional securities. Also, the Special Memorandum Account balance is maintained to meet margin requirements and does not represent real funds that an investor can withdraw.

Only an increase in the current market value can affect the Special Memorandum Account. Another fact about the SMA accounts balance is that the account increases as the securities value increases but does not depreciate as the securities value decreases in the account.

This happens because the goal of this account is to maintain the buying power generated by the unrealized gains created for future purchases. Without the Special Memorandum Account, investors would have to take out the extra equity from the bank and deposit it for future purchases.

The Special Memorandum Account primarily reflects the excess margin generated, and the SMA account multiplied by 2 represents the buying power of the margin account. The purpose of the SMA is also to provide additional buying power of margin accounts of the clients by the broker.

An special account used to hold excess margin from an investor's margin account. This type of account locks in unrealized gains and increases"" ·" Top answer: "Explanation:An special account used to hold excess margin from an investor's margin account. This type of account locks in unrealized gains and increases

Every business entity keeps sufficient stock as per the need and size of its respective business for smooth running of the business, but at the same time risk of loss by fire or by means is also there. To safeguard the businesses from any unforeseen circumstantial loss, most of the business entities buy insurance policy, which covers loss of stock (by fire) — is known as stock policy.

In consideration of the premium, insurance company takes the responsibility to compensate — if any loss occurs by fire or by other means, applicable under the insurance terms. It is in the best interest of the firm to take fire insurance policy because it covers wide range of losses (by fire) including Building damage, Furniture and Fixture loss, Plant & Machinery destruction, etc.

Following are the important points to be considered for the estimation of stock −

Gross profit is calculated by deducting net sales from the cost of goods sold. To know the gross profit of the last year, “Trading” account of the last year should be referred.

In case of fire, Memorandum Trading account is required to find the value of estimated Stock. It is prepared with the help of Gross Profit ratio of the last year, Opening Stock, Purchase, Sale, and Direct Expenses.

Value of stock as calculated at step-2 will be reduced by the value of salvaged stock to arrive at the value of Insurance Claim.

An average clause is applied to find out the value of a claim where value of the stock on the date of fire is more than the value of insured stock. Average clause is applied by the insurance companies to discourage the under insurance of stock or any other assets.

Following illustration help you to understand it in a better way −

Suppose, value of insurance policy is Rs. 1,500,000 and at the date of fire, value of stock in hand is Rs1,800,000, out of which approx. worth of 1,200,000 stock is destroyed, then the value of the claim admitted will be −

$$\small Value\:of\:Claim = \frac{1,500,000}{1,800,000} \times 1,200,000 = 1,000,000$$

Value of stock of Rs. 1,200,000 will not be admissible to the insured, rather admissible claim will be Rs. 1,000,000.

Fire occurred on the business premises of ‘Style India’ on 1st April, 2014 and most of the stock destroyed. Please ascertain the insurance claim from the following given particulars −

Solution

Trading Account of M/s Style India

(For the year ending on 31st December, 2013)

Memorandum Trading Account of M/s Style India

(Up to 01-4-2014)

Value of Stock= Rs. 322,500

Less: Stock Salvage= Rs.45,000

Insurance Claim to be lodged will be −

$$\small Value\:of\:Claim = \frac{300,000}{322,500} \times 277,500 = 258,140$$

Here an average clause will be applied because the value of insurance policy (Rs.300,000) is less than the value of stock (Rs. 322,500) on the date of fire.

A normal fire policy only indemnifies loss of stock or assets, and fails to insure any loss of profit suffered by the concerned business. Therefore, a consequential loss policy should be taken to cover the Loss of profit, Loss of Fixed expenditure, etc.

Following are the important terms used in loss of profit policy −

Following steps need to be taken to compute insurance claim on the loss of the profit, which is occurred due to dislocation of the business −

Short Sale − Short sale means loss of sale due to the incident of fire and subsequent dislocation of the business. The difference of standard turnover and the actual turnover during the period of indemnity is called short sale. It is illustrated in the following example.

Example

Calculate short sale according to the particulars given below −

Solution

Computation of Short Sale

Rate of Gross Profit − It is calculated as

$$\small\:Rate\:of\:Gross\:Profit = \frac{Net\:Profit + Insured\:Standing\:Charges}{Turnover} \times 100$$

Note − All figures given above are related to the last accounting year.

$$\small In\:Case\:of\:Loss = \frac{Insured\:Standing\:Charges − Net\:Loss}{Turnover} \times 100$$

Note − All figures given above are related to the last accounting year.

In case where all the standing charges are not insured, amount of net loss need to reduce as −

$$\small = \frac{Insured\:Standing\:Charges}{All\:standing\:Charges} \times Net\:Loss$$

Loss Due to Short Sale − It is calculated as

$$\small Loss\:due\:to\:Short\:Sale = Short\:Sale \times Rate\:of\:Gross\:profit$$

Increased Cost of Working − Increased cost of working means, certain additional expenses those have to be incurred by insured person to keep the business in running condition during the indemnity period.

Least of following figures will be considered as increased cost of working −

$$\small = \frac{Net\:Profit + Insured\:Standing\:Charges}{Net\:Profit + All\:standing\:Charges} \times Increased\:Cost\:of\:Working$$

Calculate permissible increased cost of working with following given particulars −

Solution

Least of the following will be permissible increased cost of working −

$$\small =\frac{Net\:Profit + Insured\:Standing\:Charge}{Net\:Profit + All\:standing\:Charges} \times Increased\:Cost\:of\:Working$$

$\small =\frac{45,000 + 25,000}{45,000 + 50,000} \times 10,000 \small =7,368$

$\small Short\:sale\:avoided \times Rate\:of\:Gross\:profit = 50,000 \times 15\% = 7,500$

So, Rs. 7,368 will be permissible claim of the increased cost of working.

Note − Overall permissible limit of claim for short sale + increased cost of working cannot exceed the following limit.

$$\small Maximum\:permissible\:limit\:of\:claim = Standard\:Sale \times\:Rate\:of\:Gross\:profit$$

Saving in Expenses − Saving in expenses due to fire will be deducted from the amount calculated as above.

Average Clause − In case where the value of sum insured is less than the value of policy for which policy have been taken, average clause will be applied as applied for the stock insurance (above).

STEP 3: PREPARATION OF MEMORANDUM TRADING ACCOUNT. STEP 4: ASCERTAINMENT OF “ACTUAL AMOUNT OF LOSS”. STEP 5: ASCERTAINMENT

An special account used to hold excess margin from an investor's margin account. This type of account locks in unrealized gains and increases an investor's"" ·" : "A trading account is used to buy or sell securities from the exchanges An special account

Is it necessary to prepare Memorandum Trading Account in case of a branch of a company whose Head Office is located outside the State

There are two operational signals for the SMA: a negative SMA and a positive SMA. A negative SMA is never helpful for an account. To prevent a negative SMA account an investor must be aware of SMA to prevent a negative SMA account. Aside from that, investors must grasp what occurs in the event of a negative SMA. The Special Memorandum Account operates as follows:

The SMA is analogous to credits. An investor may withdraw these credits from the SMA as cash to access additional stocks (purchase more of them), increasing their buying power.

The SMA, as well as its value, has to be tracked since traders will get a margin call from their broker if the account's value falls below zero. A margin call is a term used to describe the situation in which a broker requests more cash or assets from a client to compensate for losses and fulfil margin commitments.

To fulfil the margin requirements, the traders will be obliged to sell part of their stocks, which is never a good thing in the financial industry. Traders must also have a positive Special Memorandum Account in order to purchase anything new.

Many traders also commonly misinterpret the reasons for creating Special Memorandum Accounts. The Special Memorandum Account primarily provides additional purchasing power to the client's margin account (brokerage account).

The Special Memorandum Account may only be affected by an increase in the current market value. Another interesting point about the SMA account balance is that it grows as the value of the securities rises but does not depreciate if the value of the securities declines.

This occurs because the purpose of this account is to preserve the purchasing power produced by unrealized profits for future purchases. Investors would have to withdraw the excess equity from the bank and deposit it for future purchases if the Special Memorandum Account did not exist.

The Special Memorandum Account primarily reflects the excess margin created, and the SMA account multiplied by two indicates the margin account's purchasing power. The SMA's objective is also to offer the broker more purchasing power over the customers' margin accounts. Investors must also realise that the Special Memorandum Account occurs when the account's equity margin exceeds the 50% level specified by federal Reg T rules. Having a Demat and trading account is essential if you are trading derivatives or investing in upcoming IPOs. If you don't already have one, go to Motilal Oswal right now and open a free demat account.

By S Shaikh · 2020 — Memorandum trading a/c is prepared to know the ______. A. . claim 9) The account prepared to find out the stock as on the date of fire ….. a. Trading a/c b.

A memorandum of trading account is drawn in which the period covered is from the first day of the financial year to the last day i.e. the date of fire. The closing

Memorandum Account means an account established by the Committee in the name and for the benefit of a Participant, to record accruals of cash and/or stock or