# Meaning and Computation of abnormal loss

In accounting, Consignment can be defined as the act of sending the goods by the manufacturers or producers to their agents for the purpose of sale. The person who sends the goods is Consignor (the manufacturer or producer) and the agent who receives the goods is Consignee. During the consignment, the normal and abnormal loss may occur. We will discuss it here.

### Normal and Abnormal Loss

Goods sent on consignment does not become the property of consignee as he has not bought them. The ownership of goods remains with the consignor until they are sold, so the goods appear as inventory in the books of the consignor, not the consignee.

The consignee tries to sell the goods according to the instructions of the consignor. When the goods are sold he will deduct his expenses, commission,etc., from the sale proceeds and remits the balance to the consignor. If the goods are destroyed, consignee will not be responsible. Its burden will fall on the consignor. There are two types of losses that can occur in consignment :

### 1] Normal Loss

The normal loss means loss which is inherited and can not be avoided. It should also be considered while valuing the closing stock.

To ascertain the cost per unit after the normal loss, we use the following formula:

Cost per unit =  (Total cost+ Expenses incurred) /(Total quantity – Normal loss)

For example: If a certain amount of oranges are consigned, some of them will be destroyed in loading and unloading whereas some of them will not be in a state to be sold. Suppose, 10,000 oranges were sent to the consignee at ₹30 per kg and freight of ₹60,000. It is known that there would be a normal loss of 10%.

Cost per kg = (300000 + 60000) /  9000 (i.e. 10000-10% of normal loss) = ₹40

If unsold quantity is 500 its value will be (500*40=20000).

Note: No entry is recorded for normal loss in the books.

### 2] Abnormal Loss

Some losses are accidental or can be caused by carelessness. Example: by theft or loss by fire, flood, earthquake, war, accidents in transit, etc. Such losses are more or less abnormal. Suppose a part of goods is stolen, now this will reduce the value of stock and therefore profit on consignment. Now the best thing is to find out the cost of goods that are lost. After finding out the value, consignment a/c is credited and abnormal a/c is debited and then transferred to profit and loss a/c, so as to arrive at correct profit or loss of consignment.

Some businessmen also take an insurance policy in respect of goods sent or received. Such a policy is obtained only in respect of abnormal loss caused to goods.

### Journal Entries

#### 1. When the loss is irrecoverable:

 Date Particulars Amount (Dr) Amount (Cr) 1. Abnormal loss a/c Dr. xxx To Consignment a/c xxx (Being value of abnormal loss) 2 Profit and Loss A/c Dr xxx To Abnormal loss xxx (Being loss transferred)

#### 2. When the loss is insured and is recoverable:

(a) When full amount is recoverable

 Date Particulars Amount (Dr) Amount (Cr) 1. Abnormal loss a/c Dr. xxx To Consignment a/c xxx (Being abnormal loss valued) 2. Insurance company a/c Dr. xxx To Abnormal loss a/c xxx (Being abnormal loss transferred to insurance co.)

(b) When the loss is partly recoverable

 Date Particulars Amount (Dr) Amount (Cr) 1. Abnormal loss a/c Dr. xxx To Consignment a/c xxx (Being abnormal loss valued) 2. Insurance company a/c Dr. xxx Profit & loss a/c xxx To Abnormal loss a/c xxx (Being loss partly recoverable by insurance co. and the balance transferred to profit and loss a/c)

### Solved

On 1stJune 2018, Mr. A sent a consignment of 5,000kg of sugar, costing Rs 50 per kg to an agent Mr. B on a commission of 5% on gross sales. Expenses incurred by Mr. A are freight and insurance of Rs 1,000 and Dock charges and sundry expenses of Rs 400. Expenses incurred by Mr. B, are godown rent and insurance of Rs 400 and miscellaneous expenses of Rs 700.

Some packages containing 1000kg of sugar were damaged in transit and the contents had to be destroyed on landing as having become unfit for sale. 3,500kg of sugar was sold at Rs 60 per kg and on 30th June 2018, the date of closing accounts, the balance of the consignment remained unsold in the stock. You are required to make consignment account and Mr. B’s account in the books of Mr. A, showing the amount due from Mr. B on 30th June 2018.

##### Ans.

In the books of Mr. A

CONSIGNMENT A/C

 Date Particulars Amount Date Particulars Amount 1.06.18 To Goods sent on consignment 2,50,000 30.06.18 By Mr.B a/c- sale 2,10,000 (Rs 3,500 x Rs 60) To Bank a/c 1400 By profit and loss a/c 50,280 (Loss in transit) 30.06.18 To Mr.B a/c 11,600 By consignment stock a/c 25,140 To profit and loss a/c 22,420 2,85,420 2,85,420

Mr. B’s A/c

 Date Particulars Amount Date Particulars Amount 30.06.18 To consignment a/c 2,10,000 30.06.18 By consignment a/c 11,600 2,10,000 2,10,000

Working note:

Calculation of unsold stock and lost in transit:                       Rs.

Cost of 5,000 kg @ Rs 50                                                             2,50,000

Add: non-recurring expenses:                                                       14,00

Cost for 5,000 kg                                                                           2,51,400

Value of unsold stock = 2,51,400 x (500/5000) =                  Rs. 25,140

Value of goods lost in transit = 2,51,400 x (1000/5000) =   Rs. 50,280

## 2 thoughts on “Meaning and Computation of abnormal loss”

Please send Question paper of Semester exam to intactquiz@gmail.com

X
error: Content is protected !!