Distinct account for each loss

The balance in a Ledger account representing a distinct normal or abnormal loss stock would be profit or loss if all aspects relating to the loss stock are settled.

Loss in Transit a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignment a/c To Cash a/c To Consignee a/c	5,675 150 150	By Consignee a/c By Bank a/c By Balance c/d	2,000 1,000 2,975
tl	5,975	tl	5,975
To Balance b/d	2,975

Where some of the aspects relating to the loss stock are pending, like the insurance claim or sale of salvaged stock etc., such an ascertainment is not possible. The balance would then indicate the value of the loss stock, a notional asset which is yet to be disposed off or a notional loss which may be recovered.

Same account for multiple losses

When the same ledger account is being used for deriving the information relating to multiple loss stocks, ascertaining the balance of the loss stock account as a profit or loss is not possible, unless all aspects relating to all the loss stocks being represented by the account are settled.

The balance would indicate

• the aggregate profit or loss from all loss stocks represented by the account, when all aspects are settled or
• the aggregate value of all the loss stocks which are not yet disposed off.

Ascertainment of profit or loss relating to each loss stock distinctly straight away from the account is not possible.

Where it is not possible to consider the balance of the loss stock account as the profit or loss, a statement is prepared to enable such an ascertainment, so that the profit or loss on the loss stocks relating to which all the aspects are settled can be moved away from the account, so that the balance in the account appropriately represents the value of loss stocks which are not yet settled.

Eg: There are two losses of stock in storage, valued at 4,000 and 3,000 respectively. The insurer settled the claim for the first loss at 3,000. The claim for the second was pending settlement. 500 and 400 could be recovered through sale of salvaged stocks relating to first and second losses respectively.

loss calculations

Particulars	Loss in Storage
	First	Second
(a) Value of loss stock	4000	3,000
(b) Realisations Sale Insurance	500 3,000	400 Pending
Total (b)	3,500	?
Profit(+)/Loss(−) [b − a]	−500	?

All aspects relating to the first loss stock are settled and it resulted in a net loss of 500. The second loss stock has an unsettled value of 2,600 (3,000 − 400) as the insurance claim is pending.

Since all aspects relating to the first loss stock are settled, the ledger account providing information relating to loss stocks, Loss in Storage a/c here, should provide the information relating to the second loss stock. The balance in the Loss in Storage a/c should represent the unsettled value of the second loss stock.

Loss in Storage a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignment a/c To Consignment a/c	4,000 3,000	By Bank a/c By Cash a/c By Cash a/c By Balance c/d	3,000 500 400 3,100
tl	7,000	tl	7,000
To Balance b/d	3,100

The value of unsettled loss stock is 3,100 as indicated by the balance in this account when actually it is 2600. This account is providing erroneous information because the profit or loss on the settled loss stock is not moved away from the ledger account.

Loss in Storage a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignment a/c To Consignment a/c	4,000 3,000	By Bank a/c By Cash a/c By Cash a/c By Profit & Loss a/c By Balance c/d	3,000 500 400 500 2,600
tl	7,000	tl	7,000
To Balance b/d	2,600

Statement for ascertaining profit/loss

Considering the data relating to the losses considered in the transactions earlier:

Normal and Abnormal loss calculations

Particulars	Loss in Transit		Loss in Storage
	Normal	Abnormal	Normal	Abnormal
(a) Cost/Expenses Value of the stock Expenses incurred Commission	500 150 75	5,675 150 150	450	2,425 250 120
(a) Total	725	5,975	450	2,795
(b) Realisations Sale Insurance (Received) Insurance (Accepted & due)	1,050	2,000 1,000	350	2,200 800 500
(b) Total	1,050	3,000	350	3,500
Settled Loss Stock (c) Realisation (d) Cost/Value	1,050 725	3,000 5,975	350 450	3,500 2,795
Net [c − d]	+325	−2,975	−100	+705
	Profit(+)/Loss(−)

Calculations may have to be made to ascertain the realisations and value relating to loss stocks which have been realised i.e. loss stocks relating to which all aspects have been settled.

In problem solving such an ascertainment is an analytical and quantitative problem and not accounting problem. One should be skilled in analysing the problem data and making appropriate calculations for that.

Example

• profit on normal loss (in transit)
• loss on normal loss (in transit)
• loss on normal loss (in storage)
• profit on abnormal loss (in storage)

Dr/Cr - Transaction analysis

The profit or loss on account of the disposal of the normal or abnormal loss stock is of abnormal nature and is thus to be absorbed by the profit and loss account. The profit or loss is transferred from the loss stock account to the profit and loss account.

Where the balance in the loss stock account indicates a profit or loss, it would have a debit balance when there is a loss and a credit balance when there is a profit. Thus, transferring a profit amounts to transferring a credit balance and transferring a loss amounts to transferring a debit balance.

The account to be debited or credited is dependent on whether a loss or profit is being transferred.

• Transfer of profit

  There would be a transfer of a credit balance from the loss stock account to the profit and loss account.

  From	To	To Transfer	Entry
  A	B	Debit Balance	Dr. B Cr. A
  		Credit Balance	Cr. B Dr. A

  Profit and loss account being a nominal account, a profit transferred to it should result in a credit in it which would be by a debit in the loss stock account.

  • Debit - __ Loss a/c

    Nominal
    ↓
    Debit
    {all expenses & losses}

  • Credit - P/L a/c

    Nominal
    ↓
    Credit
    {all incomes & gains}

  Transfer of profit amounts to taking up a loss by giving away profit.

• Transfer of loss

  There would be a transfer of a debit balance from the loss stock account to the profit and loss account.

  Profit and loss account being a nominal account, a profit transferred to it should result in a debit in it which would be by a credit in the loss stock account.

  • Credit - __ Loss a/c

    Nominal
    ↓
    Credit
    {all incomes & gains}

  • Debit - P/L a/c

    Nominal
    ↓
    Debit
    {all expenses & losses}

  Transfer of loss amounts to making a profit by giving away a loss.

Note

• Debit/Credit - Distinct Loss a/c

  To derive greater information relating to losses.

• Debit - Combined Loss a/c

  To derive lesser information relating to losses.

Journal

1. profit on normal loss (in transit)

   Normal Loss a/c To Profit and Loss a/c	Dr	325	325
   [for transfer of profit on normal loss (in transit) to P & L a/c]

   • Opting to derive greater information

     Normal Loss in Transit a/c To Profit and Loss a/c

     Dr

     325

     325

2. loss on abnormal loss (in transit)

   Profit and Loss a/c To Loss in Transit a/c	Dr	2,975	2,975
   [for transfer of loss on abnormal loss (in transit) to P & L a/c]

   • Opting to derive greater information

     Profit and Loss a/c To Abnormal Loss in Transit a/c

     Dr

     2,975

     2,975

   • Opting to derive lesser information

     Profit and Loss a/c To Abnormal Loss a/c

     Dr

     2,975

     2,975

3. loss on normal loss (in storage)

   Profit and Loss a/c To Normal Loss a/c	Dr	100	100
   [for transfer of loss on normal loss (in storage) to P & L a/c]

   • Opting to derive greater information

     Profit and Loss a/c To Normal Loss in Storage a/c

     Dr

     100

     100

4. profit on abnormal loss (in storage)

   Abnormal Loss a/c To Profit and Loss a/c	Dr	705	705
   [for transfer of profit on abnormal loss (in storage) to P & L a/c]

   • Opting to derive greater information

     Abnormal Loss in Storage a/c To Profit and Loss a/c

     Dr

     705

     705

   • Opting to derive lesser information

     Abnormal Loss a/c To Profit and Loss a/c

     Dr

     705

     705

Ledger

One of the following sets of accounts will appear in the ledger depending on the choice made relating to the quantum of information that the accounting system has to provide.

• Normally

  Normal Loss a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Profit and Loss a/c	325	By Profit and Loss a/c	100

  Loss in Transit a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Profit and Loss a/c	2,975

  Loss in Storage a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Profit and Loss a/c	705

  Profit and Loss a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Normal Loss a/c To Loss in Transit a/c	100 2,975	By Normal Loss a/c By Loss in Storage a/c	325 705

• Opting to derive greater information

  Normal Loss in Transit a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Profit and Loss a/c	325

  Abnormal Loss in Transit a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Profit and Loss a/c	2,975

  Normal Loss in Storage a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Profit and Loss a/c	100

  Abnormal Loss in Storage a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Profit and Loss a/c	705

  Profit and Loss a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Normal Loss in Storage a/c To Abnormal Loss in Transit a/c	100 2,975	By Normal Loss in Transit a/c By Abnormal Loss in Storage a/c	325 705

• Opting to derive lesser information

  Normal Loss a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Profit and Loss a/c	325	By Profit and Loss a/c	100

  Abnormal Loss a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Profit and Loss a/c	705	By Profit and Loss a/c	2,975

  Profit and Loss a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Normal Loss a/c To Abnormal Loss a/c	100 2,975	By Normal Loss a/c By Abnormal Loss a/c	325 705

The ownership of the goods is with the consignor. He takes all the risks and returns on consignment

The loss on account of any normal or abnormal reasons would also be borne by the consignor himself.

Thus, the consignee does not record the transaction relating to profits or losses on loss stocks in his books of accounts.