Recording/Journalising the value of Normal/Abnormal Losses

... From Page 16

   
 
Since the ownership of the business lies with the consignor and he alone carries the total risk in the business, the loss on account of any normal or abnormal reasons would also be borne by the consignor himself. The consignee would bear no part of the loss. Therefore, only the consignor finds the need to value and record either the normal loss or the abnormal loss.

The consignee is the first person who would be in the know of the losses, except in the case of loss in transit where there is a possibility of the consignor knowing about the loss first. The consignor on knowing the loss in quantitative terms would value the loss based on the information relating to the value of goods consigned and the expenses paid by him as well the direct expenses paid by the consignee.

Value of Normal Loss

Normal loss is valued at net realisable value or market price. Therefore if the realisable price/market price of normal loss is not known we assume it to be nil. There may be different situations that we may come across in dealing with the normal loss stock.

The normal loss being valued at market price, implies that it is being attributed a certain notional value based on the assessment regarding its realisable value. This value may or may not be actually realised when the loss stock is sold. The zero value of normal loss stock implies that it has no realisable value under normal circumstances.

Valuation and Recording

The problem of valuation and recording the of closing stock are two different aspects. Valuing loss needs you to have the understanding relating to the principles of valuation of stock. Recording the value in books needs you to have the accounting knowledge which is dealt with below.

The accounting treatment of normal loss and abnormal loss is not dependent on the point at which the loss arises. The fact that the loss has occurred in transit or in storage would be relevant for valuation of the loss only and not for their accounting treatment.

The information relating to the losses is capable of being conveyed by the consignee and received by the consignor at any time during the year. Specifically with regard to abnormal loss the information is passed on instantaneously to enable the insurance claim to be made in time. Therefore recording of normal and abnormal losses is done as and when the information relating to the same is received by the consignor.

15. June 26th: For the value of normal loss in transit Rs. 500
16. June 26th: For the value of abnormal loss in transit Rs. 5,675.
17. June 26th: For the value of normal loss in storage Rs. 450.
18. June 26th: For the value of abnormal loss in storage Rs. 2,425.

Consignor's Books Hide/Show

Accounts Effected by the Transaction » Identification & Analysis:

The Consignment a/c is charged with the value of goods consigned and also the expenses incurred on consignment which include the direct expenses. This indicates that the total value of the stock has been charged to the consignment account as expenditure.

  • Debit »

    • 15, 17: Normal Loss a/c

      The normal loss if it has a value would be a miscellaneous asset till the time it is sold. We indicate this asset with the name "Normal Loss a/c". This miscellaneous asset account remains till it is disposed off by the sale of the asset or by writing it off as unrealisable.
      [Normal Loss a/c – Real a/c – Debit .... ]
    • 16, 18: Abnormal Loss a/c

      The abnormal loss stock has a value and would be a miscellaneous asset till the time it is sold or disposed. We indicate this asset with the name "Abnormal Loss a/c". This miscellaneous asset account remains till it is disposed off by the sale of the asset or by claiming insurance on it or writing it off as unrealisable.
      [Abnormal Loss a/c – Real a/c – Debit .... ]
  • Credit »

    • 15,17: Vijayawada Consignment a/c

      Normal loss is valued at Market Price. The difference between the market price and the actual cost of the goods lost on account of normal reasons is to be borne by the Consignment a/c as a charge. To ensure this, the value of normal loss is eliminated from the Consignment a/c by crediting the Consignment a/c.
      [Consignment a/c – Nominal a/c – Credit .... ]
    • 16,18: Vijayawada Consignment a/c

      Abnormal loss is valued at Cost or its full value. No amount of the loss is to be borne by the Consignment a/c and therefore has to be eliminated from the Consignment a/c. The value of abnormal loss is eliminated from the Consignment a/c by crediting the Consignment a/c.
      [Consignment a/c – Nominal a/c – Credit .... ]

Note:

To avoid confusion, at times it would be convenient to support the debit and credit with logical reasoning rather than the principles of debit and credit.

Alternative Explanation

Transfer of a debit balance from One a/c to a Second would result in the Second a/c being debited and the first account being credited.

Therefore, since a debit balance (the value of normal loss stock or abnormal loss stock) is to be eliminated from the Consignment a/c it is transferred to the "Normal Loss a/c" or "Abnormal Loss a/c" as the case may be resulting in a Debit in the "Normal Loss a/c" or "Abnormal Loss a/c" and a Credit in the "Consignment a/c".

The effect of the transactions can be summarised as
15 :(i) Normal Loss and (ii) Consignment a/c a/c
16 :(i) Abnormal Loss and (ii) Consignment a/c a/c
17 :(i) Normal Loss and (ii) Consignment a/c a/c
18 :(i) Abnormal Loss and (ii) Consignment a/c a/c

DrVijayawada Consignment 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
 

By Nor. Loss a/c (15)
By Ab. Loss a/c (16)
By Nor. Loss a/c (17)
By Ab. Loss a/c (18)
 





 

500
5,675
450
2,425
 
DrNormal Loss a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)

30/06/05
30/06/05
 

To Vij. Con a/c (15)
To Vij. Con a/c (15)
 



 

500
450
 




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

30/06/05
30/06/05
 

To Vij. Con a/c (15)
To Vij. Con a/c (15)
 



 

5,675
2,425
 




Note:
In problem solving generally we come across only instance of loss of each kind. All the losses of the same kind may be dealt with in one account or a separate account be opened for each type and in each instance. Remember, the greater the information you need, the greater the accounting heads you have to maintain. If maintaining a separate account for each instance of the loss, the account heads are identified using words indicating the nature or loss. [Loss on Account of Fire a/c, Storage Normal Loss a/c, Normal Loss (Transit) a/c, Fire Loss a/c, Abnormal Loss (Fire) a/c, etc.] There will be only one normal loss account to record all normal losses.

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
500
500
June 30th Dr
5,675
5,675
June 30th Dr
2,425
2,425

Consignees Books Hide/Show

The ownership of the goods is with the consignor. The consignee is no way connected to the ownership of the goods. The consignee therefore will not record any loss in the value of goods in his books of accounts.

There is no entry for the value of losses in the books of the consignee

Author Credit : The Edifier ... Continued Page 18

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