Net Profit/Loss on Disposal of Normal/Abnormal Loss Stocks

... From Page 21

   
 

Profit/loss: Normal Loss Stock

The normal loss is valued at its market price or the net realisable value. This value is a notional value. Normally this value is not ascertained by selling the normal loss stock. Therefore, during the course of its actual sale, the normal loss stock may realise a value which may be equal to or greater than or less than its notional value. This would give rise to a possibility of profit or loss on the sale/disposal of the normal loss stock.

This profit or loss is of abnormal nature (Under normal circumstances, the normal loss stock should realise an amount equal to its value). There may be abnormal profit on account of the normal loss stock being further treated/processed and sold at a higher price.

Considering the data relating to the example discussed in the earlier transactions:

 
Particulars Normal Loss
(in Transit)
Normal Loss
(in Storage)
Incomes/Realisations:    
Sale Realisation 1,050 350
Total Realisations 1,050 350
Expenses/Costs:    
Value of the stock 500 450
Expenses incurred on the stock 150
Commission on Sale 75
Total Cost/Value of the Normal Loss Stock Sold 725 450
Profit(+)/Loss(−) [Sale Realisation − Total Cost/Value] + 325 − 100

Profit/loss: Abnormal Loss Stock

The abnormal loss is valued at cost. This value is the actual value of the stock had it not been damaged/destroyed. Since the stock is damaged/destroyed, the amount that is realised by its sale naturally would be less than the actual cost. The abnormal loss may also have been insured where there is a possibility of the loss being compensated by the insurance amount received from the insurance company.

These realisations measured against the value of the abnormal loss stock, the expenses incurred, commissions paid for sale etc., would leave a certain amount of profit or loss or would result in a no profit or no loss condition. This profit/loss is also of abnormal nature.

Considering the data relating to the example discussed in the earlier transactions:

 
Particulars Abnormal Loss
(in Transit)
Abnormal Loss
(in Storage)
Incomes/Realisations:    
Sale Realisation 2,000 2,200
Insurance Amount Received 1,000 800
Insurance Amount Receivable 500
Total Realisations 3,000 3,500
Expenses/Costs:    
Value of the stock 5,675 2,425
Expenses incurred on the stock 150 250
Commission on Sale 150 120
Total Cost/Value of the Abnormal Loss Stock Sold 5,975 2,795
Profit(+)/Loss(−) [Sale Realisation − Total Cost/Value] − 2,975 + 705

33. June 30th: For the profit on normal loss (in transit) stock.
34. June 30th: For the loss on normal loss (in storage) stock.
35. June 30th: For the loss on abnormal loss (in storage) stock.
36. June 30th: For the profit on abnormal loss (in storage) stock.

Consignor's Books Hide/Show

Accounts Effected by the Transaction » Identification & Analysis:

33, 36

Profit arises when there is a greater realisation than the asset value (greater credit than the debit balance in the asset account). Since there is a profit, the normal loss a/c or the abnormal loss a/c show a credit balance. The gain when transferred to the P/L a/c results in a credit in the P/L a/c .

Transfer of a credit balance from one account to the second results in the second account being credited and the first account being debited.

34, 35

Losst arises when there is a lesser realisation than the asset value (lesser credit than the debit balance in the asset account). Since there is a loss, the normal loss a/c or the abnormal loss a/c show a debit balance. The loss when transferred to the P/L a/c results in a debit in the P/L a/c .

Transfer of a debit balance from one account to the second results in the second account being debited and the first account being credited.

  • Debit »

    • 33: Normal Loss a/c


      [Normal Loss a/c – – .]
    • 34, 35: Profit and Loss a/c

      The loss on the realisation of the normal loss stock as well as the abnormal loss stock is to be transferred to the profit and loss account.
      [Profit & Loss a/c – Nominal a/c – Debit all Expenses and Losses.]
    • 36: Abnormal Loss a/c


      [Abnormal Loss a/c – – .]
  • Credit »

    • 33, 36: Profit and Loss a/c

      The profit on the realisation of the normal loss stock as well as the abnormal loss stock is to be transferred to the profit and loss account.
      [Profit & Loss a/c – Nominal a/c – Credit all Incomes and Gains.]
    • 34: Normal Loss a/c


      [Normal Loss a/c – – .]
    • 35: Abnormal Loss a/c


      [Abnormal Loss a/c – – .]

Note:

  1. It would be sometimes convenient to explain the debit and credit by logical reasoning rather than by the principles of debit and credit.
  2. Generally there would be only one normal loss account maintained for all normal losses. Similarly there would be only one abnormal loss account being maintained for all abnormal losses. However where the organisation needs greater information separate accounts would be maintained for each instance of the loss. More so, with abnormal losses.
  3. When there is only normal loss account or abnormal loss account, no separate entries would be passed for the gain or loss on each separate instance of the losses. The net balance in the Normal Loss account or the Abnormal loss account would be transferred to the profit and loss account. Here it would be a net gain of Rs. 50 in case of Normal Loss stock and a net loss of Rs. 2,270 in case of abnormal loss stock.

The effect of the transactions can be summarised as
33 :(i) Normal Loss a/c and (ii) Profit and Loss a/c
34 :(i) Profit and Loss a/c and (ii) Normal Loss a/c
35 :(i) Profit and Loss a/c and (ii) Abnormal Loss a/c
36 :(i) Abnormal Loss a/c and (ii) Profit and Loss a/c

 
DrNormal Loss (in transit) a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)

30/06/05
30/06/05


30/06/05


30/06/05

 

To Vij. Con a/c (15)
To Cash a/c (19)
(Or) Bank a/c
(Or) Out. Exp a/c
To Cash a/c (27)
(Or) Bank a/c
(Or) Out. Exp a/c
To P & L a/c
                Total
 










 

500
150


75


325
1,025
 

30/06/05
 
 
 
 
 
 

By Cash a/c (23)
(Or) Bank a/c
(Or) Out. SP a/c





                Total
 










 

1,050







1,050
 

 
DrNormal Loss (in storage) a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)

30/06/05


 

To Vij. Con a/c (16)

                Total
 




 

450

450
 

30/06/05
30/06/05

 

By M T a/c (25)
By P & L a/c
                Total
 




 

350
100
450
 

 
DrAbnormal Loss (in transit) a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)

30/06/05
30/06/05


30/06/05


 

To Vij. Con a/c (17)
To Cash a/c (20)
(Or) Bank a/c
(Or) Out. Exp a/c
To M T a/c (28)

                Total
 








 

5,675
150


150

5,975
 

30/06/05
30/06/05



30/06/05

 

By M T a/c (24)
By Bank a/c (30)



By P & L a/c
                Total
 








 

2,000
1,000



2,975
5,975
 

 
DrAbnormal Loss (in storage) a/c Cr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)

30/06/05
30/06/05
30/06/05


30/06/05

 

To Vij. Con a/c (18)
To M T a/c (22)
To M T a/c (29)


To P & L a/c
                Total
 








 

2,425
250
120


705
3,500
 

30/06/05


30/06/05
30/06/05


 

By Cash a/c (26)
(Or) Bank a/c
(Or) Out. SP a/c
By M T a/c (31)
By Ins. Co. a/c (32)

              Total
 








 

2,200


800
500

3,500
 

 
Journal in the books of M/s __ for the period from ____ to _____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
June 30th Dr
325
325
June 30th Dr
100
100
June 30th Dr
2,975
2,975
June 30th Dr
705
705

Single Normal Loss and Abnormal Loss account

DrNormal Loss (in transit) a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)

30/06/05
30/06/05
30/06/05


30/06/05


30/06/05
30/06/05

 

To Vij. Con a/c (15)
To Vij. Con a/c (16)
To Cash a/c (19)
(Or) Bank a/c
(Or) Out. Exp a/c
To Cash a/c (27)
(Or) Bank a/c
(Or) Out. Exp a/c
To M T a/c (22)
To P & L a/c
                Total
 












 

500
450
150


75


250
125
1,400
 

30/06/05


30/06/05







 

By Cash a/c (23)
(Or) Bank a/c
(Or) Out. SP a/c
By M T a/c (25)




(Or) Bank a/c

              Total
 












 

1,050


350






1,400
 
DrAbnormal Loss (in transit) a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)

30/06/05
30/06/05
30/06/05


30/06/05
30/06/05
30/06/05


 

To Vij. Con a/c (17)
To Vij. Con a/c (18)
To Cash a/c (20)
(Or) Bank a/c
(Or) Out. Exp a/c
To M T a/c (22)
To M T a/c (28)
To M T a/c (29)

                   Total
 











 

5,675
2,425
150


250
150
120

8,770
 

30/06/05
30/06/05


30/06/05
30/06/05

30/06/05
30/06/05

 

By M T a/c (24)
By Cash a/c (26)
(Or) Bank a/c
(Or) Out. SP a/c
By Bank a/c (30)
By M T a/c (31)

By Ins. Co. a/c (32)
By P & L a/c
              Total
 











 

2,000
2,200


1,000
800

500
2,270

8,770

Consignees Books Hide/Show

Since the total ownership of the business lies with the consignor, the consignee would not be concerned with these gains or losses on account of the normal or abnormal loss stocks.

No entries would be recorded in these books

Author Credit : The Edifier ... Continued Page 23

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