Valuation and Treatment of Normal and Abnormal Loss in Consignment Accounting
Valuation and Treatment of Normal and Abnormal Loss in Consignment Accounting:
Learning Objectives:
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How are the normal and abnormal losses are calculated and treated in consignment accounting?
Normal Loss:
Normal loss of goods should also be considered while valuing the closing stock or unsold stock. Normal loss means inherent and unavoidable loss. For example if a certain quantity of coal is consigned, some of it is bound to be lost because of loading and unloading and because of some of it turning into dust. In the nature of coal shortage is unavoidable.
Example:
Suppose 100 tons of coal are despatched. The cost of one ton of coal is $20 and the freight incurred is $470. To the consignor the total cost is $2,470. Suppose, the consignee receives only 95 tones. In that case the consignor can say that the cost of one ton of coal is $2,470/95 or $26. If 20 tons of coal are left unsold with the consignee, the value of stock will be $20 × $26 = $520.
Abnormal Loss:
Some losses are accidental or may arise out of carelessness. For example, theft of goods or destruction of goods by fire. Such losses are more or less abnormal and in any case, do not occur often. Suppose part of the goods stolen. This will reduce the value of stock and, therefore, the profit on consignment. In order to see the effect of theft clearly, it is better to find out the value of the goods thus lost. After finding out the value, the consignment account is credited and profit and loss account is debited. The effect of this will be that the consignment account will show its proper profit and in the profit and loss account this profit will be reduced to show actual profit. If part of the loss is recoverable from an insurance company, the amount which can be recovered should be deducted from the loss for the purpose of debiting the profit and loss account. The amount of the loss should be calculated like stock on consignment.
Example/Problem of Abnormal Loss:
1,000 Motors were consigned by A & Co., of Lahore to Bashir of Karachi at an invoice cost of $150 each. A & Co., paid freight $10,000 and insurance $1,500. During transit 100 motors were completely destroyed. Bashir took delivery of the remaining motors and paid $14,400 as duty.
Bashir sent a bank draft to A & Co., for $50,000 as an advance payment and later sent an account sale showing that 800 motors were sold at $220 each. Expenses incurred by Bashir on godown rent and advertisement etc., amounted to $2,000. Bashir is entitled to commission of 5 per cent.
Required: Prepare consignment account and Bashir’s account in the books of A & Co., assuming that nothing has been recovered from the insurance company due to defect in the policy.
Consignment to Karachi Account
$ | $ | ||
To Goods sent on consignment | 1,50,000 | By sales (800 × 220) | 1,76,000 |
To Bank – freight and insurance | 11,500 | By Profit and loss account – Ab. Loss* | 16,150 |
To Bashir – duty | 14,400 | By Stock on consignment** | 17,750 |
To Bashir – expenses | 2,000 | ||
To Bashir – commission | 8,800 | ||
To Profit and loss account | 23,200 | ||
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2,09,900 | 2,09,900 | ||
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Bashir
$ | $ | |||
To Consignment account | 1,76,000 | By Bank | 50,000 | |
By Consignment account | ||||
Duty | 14,400 | |||
Expenses | 2,000 | |||
|
16,400 | |||
By Consignment account-commission | 8,800 | |||
By Balance c/d | 1,00,800 | |||
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|||
1,76,000 | 1,76,000 | |||
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Working Note:
(1) |
*Calculation of abnormal loss: | |
100 motors at $150 each | $15,000 | |
Add 100/1000 of freight and insurance (11,500 × 100/1000) | 1,150 | |
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Abnormal loss | 16,150 | |
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(2) |
**Calculation of Closing Stock: | |
100 motors at $150 each | $15,000 | |
Add 100/1000 of freight and insurance (11,500 × 100/1000) | 1,150 | |
100/900 of duty | 1,600 | |
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Closing stock or unsold stock | 17,750 | |
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You may also be interested in other articles from “accounting for consignment” chapter:
- Definition and Explanation of Consignment
- Distinction/Difference Between Consignment and Sale
- Definitions of Important Terms Used in Consignment Accounting
- Consignment Accounting Journal Entries
- Valuation of Unsold Stock Or Closing Stock in Consignment Accounting
- Valuation and Treatment of Normal and Abnormal Loss in Consignment Accounting
- Invoicing Goods Higher Than Cost in Consignment
- Consignment Accounting Problems, Exercises and Questions
- Consignment Accounting Questions and Answers
Other Related Accounting Articles:
- Consignment Accounting Exercises and Problems
- Valuation of Unsold Stock Or Closing Stock in Consignment Accounting
- Invoicing Goods Higher Than Cost in Consignment
- Definitions of Important Terms Used in Consignment Accounting
- Consignment Accounting Questions and Answers
- Distinction/Difference Between Consignment and Sale
- Definition and Explanation of Consignment
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