Every business contains some type of loss. Whether such firms may be types of manufacturing or rendering services. As some losses can be avoided and some are unavoidable losses. These types of loss can be two types as follows.
LOSS OF STOCK
IN the consignment goods have to move from one place to another Place. It is natural loss to the goods may take place. The consignor will have to bear the cost of such loss, but not to the consignee. Loss of goods in consignment is of two types: difference between normal loss and abnormal loss
- NORMAL LOSS
- ABNORMAL LOSS
A.)Accounting For Normal Loss:- Normal loss occurs when goods are lost or damaged due to unavoidable or Natural causes such as losses due to Evaporation, Normal Leakage, Spoilage, Breaking, Drying etc. Thus normal loss is unavoidable and arised due to the normal causes or inherent characteristics of the goods. Such normal loss is borne by the good units. Such loss accounting importance will be arised due to the unsold stock being valued. The cost of unsold stock increases due to such normal loss. Because the cost of such loss will be shifted on the remaining unsold goods. Following formula is used for calculating the value of unsold stock. difference between normal loss and abnormal loss
Value of Stock on Consignment = Total Cost of Goods Consigned/Total Quantity Sent-Quantity of Normal Loss × Unsold Quantity
Note:- Normal loss is not shown in the Consignment Account. So there is no need to pass any entry in the books of account.
B.)Accounting of Abnormal Loss:- When loss is occured due to unexpected or unnatural reasons such as by fire, riot, flood, theft, road accident etc. Then such loss is treated as abnormal loss. Such loss may have occurred in the consignee place or in the transit way. However, Abnormal loss can be Avoided. To find the correct profit on the consignment account, Abnormal losses are eliminated from the consignment account. Thus, abnormal losses should be charged to the profit and loss account.
The following are the Accounting treatment for abnormal loss in the books of consignor to know the difference between normal loss and abnormal loss
CASE – I WHEN THE GOODS ARE NOT INSURED
( a ) When abnormal loss is incurred
Abnormal loss Account Dr. (Abnormal loss)
To Consignment Account
( b ) Transfer of abnormal loss
Profit & loss Account Dr. (Abnormal loss)
To Abnormal loss Account
CASE – II WHEN THE GOODS ARE INSURED
( a ) When abnormal loss is incurred
Abnormal loss Account Dr. (Abnormal loss)
To Consignment Account
( b ) When insurance company admits the claim
Insurance Company/Insurance Claim Account Dr. ( with Amount of claim admitted )
Profit & Loss Account Dr. ( With unrecovered loss )
To abnormal Loss Account ( Abnormal loss value )
( c ) Receipt of Insurance Claim
Bank Account Dr.
To insurance Company/Insurance Claim Account
Difference Between Normal Loss and Abnormal Loss
| BASIS OF DIFFERENCE | Normal Loss Abnormal Loss |
| 1.Avoidable | Normal lossThis loss arises due to the normal wear tear as Natural features, internal Cause, Hance Unavoidable. Abnormal LossThis loss is avoidable with proper care and handling during the storing and transit. |
| 2.Causes | Normal lossThis loss is as natural or inherent as good features such as evaporation, loss of weight drying etc. Abnormal LossThis loss arises due to external reasons like fire, carelessness and theft etc. |
| 3.Calculations | Normal LossThis loss is not calculated separately in the consignment. While Abnormal LossAbnormal value of loss is calculated in the same manner as the value of stock on consignment. |
| 4.Insurance | Normal LossNormal loss is not insurable in the consignment account. Abnormal LossAbnormal loss can be insured in the consignment. |
| 5.Journal Entries | Normal LossNo separate journal entries are made on the normal loss in the consignor books. Abnormal LossProper journal entry are required to treat this loss in the consignor books. |
| 6.Adjustments | Normal LossThe value of remaining goods are inflated by the cost of such loss as under : Value of closing Stock = Total Cost/Total Qty – Normal loss qty × Unsold Stock (Qty) Abnormal LossAbnormal loss is credited to the consignment account in order to calculate the normal profit or loss on Consignment. |
| 7.Treatment in Accounts | Normal LossCost of normal loss is borne by the remaining goods. Abnormal lossCost of the abnormal goods are not borne by the remaining goods. |
| 8.Part of Cost | Normal LossNormal loss is treated as part of the cost. Abnormal LossIt is charged to the profit & loss account not being treated as a part of the cost. |
Conclusion:- Normal loss is natural and unavoidable. Whose no entry will be recorded. But such normal loss will be imposed on the remaining goods. Whose costs will be raised. Abnormal Loss is an unexpected and unnatural loss. Whose journal entry treatment is done as we have done above discussed. Thus, abnormal loss can be decreased with careful attention towards the goods transit one way or goods lying in the stores. difference between normal loss and abnormal loss
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