Recording Net Effect of losses without using Normal/Abnormal Loss accounts

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Consignor Books

The Consignor is the sole owner of the goods on consignment. Recording the value of Normal and Abnormal Losses and the profit or loss on their disposal is done only in the books of the Consignor. Recording the net effect, which clubs all these transactions is something relevant to the consignor books only.

All the aspects relating to the consignee even in these cases would be done in the same way as earlier.

Normal Loss

Recollect the sequence of transactions and their recordings relating to the normal loss stock.
  1. For the Value of the normal loss stock
  2. For the Expenses incurred on the normal loss stock
  3. For the sale of normal loss stock
  4. For the commission payable for the sale of normal loss stock
  5. For the abnormal profit or loss on the normal loss stock

What happens to the normal loss account ultimately?

The normal loss account is closed ultimately by transferring whatever balance it has to the profit and loss account.

Recording Net Effect

Recording the Net Effect, is to be understood in two different contexts.
  • Normal Loss realising its value without expenses and commission

    Generally in problem solving, in majority of cases we come across situations where the normal loss is assumed to realise the value at which it is assessed. Therefore in the absence of additional expenses, commission payable etc., normal loss account would show neither gain nor loss.

    In such a sitatuation we have only two transactions to be recorded relating to normal loss:

    1. For the Value of the normal loss stock
    2. For the sale of normal loss stock

     
    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
    1,000
    1,000
    June 30th Dr



    1,000



    1,000

    Net Effect

    Writing journal entries reflecting the net effect implies recording the journal entry that would be brining in the effect of two or more transactions clubbed together eliminating the presence or use of some ledgeraccounts in the process. This would enable the recording the effect of the transactions with minimal recording work.

    The choice between elaborate recording and recording just the net effect is based on the organisational information needs. Remember, the more information we need, the more accounting heads we have to maintain. Thus, in recording the net effect we have to understand that we will be satisfied with minimum amount of detail/information availability.

    The net effect of two or more journal entries can be assessed by deriving the net debits and credits in each account after setting off the credits and debits for each entry in them. The journal entry formed by taking the net debits and credits would be the entry for the net effect.
    Account Head Entry (No) Debit Credit Net Dr/Cr
    Normal Loss a/c : (1)
    (2)
    1,000

    1,000
    Total 1,000 1,000 Nil
    Vijayawadas Consignment a/c : (1) 1,000
    Total 1,000 1,000 (Cr)
    Cash/Bank/Sale Proceeds Outstanding
    /Maruthi Traders a/c :
    (2) 1,000
    Total 1,000 1,000 (Dr)
    Therefore the entry for the net effect would be

    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
    Dr
    Dr
    Dr




    1,000



    1,000

    The Consignment account would be credited with the amount realised by the sale of the normal loss stock directly. Depending on whether the normal loss stock is sold for cash or through a cheque or on credit or by the consignee the relevant account is debited.

    This entry would be passed when the normal loss stock is realising the full value. In majority of the cases we treat normal loss this way.

  • When the normal loss stock has no realisable value

    Assume the entry for recording being passed with zero amounts, where there is no realisable value for normal loss stocks. There would be no effect of this entry on any account. However, one should remember that the normal loss stock (in quantity terms) should be considered for the purpose of valuation of stocks and abnormal losses even when it has no realisable value. It should be adjusted in quantitative terms in evaluation of stocks and losses.
  • When there is a gain

    When the normal loss stock is being sold at a gain, the journal entries for ascertaining the net effect are the entries:
    1. For the Value of the normal loss stock
    2. For the sale of normal loss stock
    3. For the credit balance in the normal loss stock account transferred to profit and loss account
    The journal entries for these are

     
    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
    1,000
    1,000
    June 30th Dr



    1,200



    1,200
    June 30th Dr
    200
    200

    Net Effect

    Account Head Entry (No) Debit Credit Net Dr/Cr
    Normal Loss a/c : (1)
    (2)
    (3)
    1,000

    200

    1,200
    Total 1,200 1,200 Nil
    Vijayawadas Consignment a/c : (1) 1,000
    Total 1,000 (Cr)
    Cash/Bank/Sale Proceeds Outstanding
    /Maruthi Traders a/c :
    (2) 1,200
    Total 1,200 1,200 (Dr)
    Profit and Loss a/c : (3) 200
    Total 200 200 (Cr)
    Therefore the entry for the net effect would be

     
    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




    1,200



    1,000
    200

    The Consignment account would be credited with the amount realised by the sale of the normal loss stock directly. Depending on whether the normal loss stock is sold for cash or through a cheque or on credit or by the consignee the relevant account is debited with the full amount realised and the profit and loss account is credited with the amount of profit..

    Alternative Treatment

    When posted in the profit and loss account the above entry would read "By Cash a/c" on the credit side of the profit & Loss a/c. Therefore to eliminate confusion, the total sale proceeds is credited to the "Consignment a/c" and the profit is transferred from the "Consignment a/c" to the profit and loss account. In such a case we record two entries in place of one.

    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



    1,200



    1,200
    June 30th Dr
    200
    200

  • When there is a loss

    When the normal loss stock is being sold at a loss, the journal entries for ascertaining the net effect are the entries:
    1. For the Value of the normal loss stock
    2. For the sale of normal loss stock
    3. For the debit balance in the normal loss stock account transferred to profit and loss account
    The journal entries for these .

     
    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
    1,000
    1,000
    June 30th Dr



    850



    850
    June 30th Dr
    150
    150

    Net Effect

    Account Head Entry (No) Debit Credit Net Dr/Cr
    Normal Loss a/c : (1)
    (2)
    (3)
    1,000


    850
    150
    Total 1,000 1,000 Nil
    Vijayawadas Consignment a/c : (1) 1,000
    Total 1,000 1,000 (Cr)
    Cash/Bank/Sale Proceeds Outstanding
    /Maruthi Traders a/c :
    (2) 850
    Total 850 850 (Dr)
    Profit and Loss a/c : (3) 150
    Total 150 150 (Dr)
    Therefore the entry for the net effect would be

     
    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




    850



    150





    1,000

    The Consignment account would be credited with the amount realised by the sale of the normal loss stock directly as well as the loss. Depending on whether the normal loss stock is sold for cash or through a cheque or on credit or by the consignee the relevant account is debited with the full amount realised and the profit and loss account is debited with the amount of loss.

    An alternative entry would not be needed here since the loss would be posted as "By Consignment a/c" in the profit and loss a/c.

  • When there is commission on sale made

    Where there is commission on sale made, the sale proceeds can be considered net by deducting the commission paid. Then based on whether there is any gain or loss, the entry for the net effect can be passed.

    However where there is commission paid and the organisation needs to show this information in books, it would be appropriate to transfer the value of normal loss from the consignment account to the Normal loss account and then record the other transactions accordingly.

  • When there are expenses on normal loss stock

    Where the expenses paid are of normal nature, they are charged to the consignment account and the normal loss account is not affected. Therefore the entry for net effect can be passed ignoring the expenses for the purpose of recording the normal loss transactions.

    Where the expenses paid are of an abnormal nature they need to be debited in the "Normal loss account". In such circumstances it would be appropriate to transfer the value of normal loss from the consignment account to the Normal loss account and then record the other transactions accordingly.

Abnormal Loss

The sequence of transactions relating to the abnormal loss stock.
  1. For the Value of the abnormal loss stock
  2. For the Expenses incurred on the abnormal loss stock
  3. For the sale of abnormal loss stock
  4. For the commission payable on the sale of abnormal loss stock
  5. For the insurance amount realised on the abnormal loss stock
  6. For the profit or loss on the abnormal loss stock

What happens to the abnormal loss account ultimately?

The abnormal loss account is closed ultimately by transferring whatever balance it has to the profit and loss account.
  • Abnormal Loss stock value realised through sale & insurance without expenses & commission

    Generally in problem solving, in majority of cases we come across situations where the abnormal loss stock is sold at a price far lesser than the good stock and the insurance company making good the loss according to their calculations. Therefore in the absence of additional expenses, commission payable etc., abnormal loss account would show either a profit or loss based on the total value realised through sale of salvaged stock as well as through insurance. There may be only sale of abnormal loss stock or only insurance realisation or both. In such cases we have four transactions to be recorded relating to abnormal loss.
    1. For the Value of the abnormal loss stock
    2. For the sale of abnormal loss stock
    3. For the insurance amount realised on the abnormal loss stock
    4. For the profit or loss on the abnormal loss stock
    The journal entries for these are:

     
    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
    4,500
    4,500
    June 30th Dr



    1500



    1500
    June 30th Dr



    1,800



    1,800
    June 17th Dr
    1,200
    1,200

    Net Effect

    Account Head Entry (No) Debit Credit Net Dr/Cr
    Abnormal Loss a/c : (1)
    (2)
    (3)
    (4)
    4,500



    1,500
    1,800
    1,200
    Total 4,500 4,500 Nil
    Vijayawadas Consignment a/c : (1) 4,500
    Total 4,500 4,500 (Cr)
    Cash/Bank/Sale Proceeds Outstanding
    /Maruthi Traders a/c :
    (2) 1,500
    Total 1,500 1,500 (Dr)
    Bank/Insurance Company/Maruthi Traders a/c: (3) 1,800
    Total 1,800 1,800 (Dr)
    Profit and Loss a/c: (4) 1,200
    Total 1,200 1,200 (Dr)
    Therefore the entry for the net effect would be

    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



    Dr


    Dr








    1,500



    1,800


    1,200








    4,500

    The Consignment account would be directly credited with the amount realised by the sale of the abnormal loss stock, insurance amount realised and the net loss in relation to the abnormal loss stock. Depending on whether the abnormal loss stock is sold for cash or through a cheque or on credit or by the consignee the relevant account is debited. Also depending on whether the insurance amount has been received by the consignor through a cheque or by the consignee or is still to be received, the relevant account is debited. The profit and loss account is debited with the net loss on account of the abnormal loss stock.

    This entry is explained just to enable the learner to understand the possibility. However in majority of the cases, the transactions relating to the abnormal loss stock are dealt with separately by transferring the value of the abnormal loss stock to the Abnormal Loss a/c.

  • Abnormal Loss stock value realised through sale & insurance with expenses & commission

    When there are expenses relating to the abnormal loss stock and commission on sale paid/payable relating to the abnormal loss stock it is advisable to deal with the transactions in a separate account only.

    It is theoretically possible to combine the entries and find the net effect.

Note:

All the above explanations relate to the consignor books only. These aspects are not recorded in the consignee books.
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