The consignee would be the first person to 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.

Valuation of Losses

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 as the direct expenses paid by the consignee.

Valuation of loss is an act that is distinct from recording the losses in the books of accounts.

Point of occurrence of Losses

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 loss 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 to enable insurance claim to be made in time by the consignor. Therefore recording of normal and abnormal losses is done as and when the information relating to the same is received by the consignor.

Loss accounts - Number and names

The number of ledger accounts used for deriving information relating to losses is dependent on the information needs of the organisation.

• Deriving maximum possible information

  To derive the maximum possible information relating to losses, a separate account for each loss is maintained.

  To loss accounts are named to enable distinct identification.

  • Normal Loss in Transit a/c
  • Normal Loss in Storage a/c
  • Abnormal Loss in Transit a/c
  • Abnormal Loss in Storage a/c

• Minimise information derived

  To minimise the derivation of information relating to losses, a single loss account for each type of loss is maintained.

  To loss accounts are named based on type of loss

  • Normal Loss a/c, for all normal losses
  • Abnormal Loss a/c, for all abnormal losses

• Conventionally

  The idea of maintaining distinct ledger accounts for each loss may not be of much use in the case of normal losses and as such a single normal loss account and distinct ledger accounts for each abnormal loss may be maintained.

  Since there would be only one account for recording normal losses, it is named Normal Loss a/c.

  The abnormal loss accounts are named with the terms indicating the nature of loss, skipping the use of the word Abnormal in the account name.

  • Normal Loss a/c
  • Loss in Transit a/c
  • Loss in Storage a/c

Example

1. value of normal loss in transit 500
2. value of abnormal loss in transit 5,675
3. value of normal loss in storage 450
4. value of abnormal loss in storage 2,425

Since we are dealing with recording the transactions, we are assuming that the valuation has been done.

Dr/Cr - Transaction analysis

Consignment account is charged with the value of goods consigned and thus includes the value of loss stocks also.

Loss stocks are stocks not used for consignment. Their value has to be taken away from the consignment account thereby reducing the charge on consignment a/c. This is done by transferring a debit balance equal to the value of the loss stock to an account representing the loss stock.

The account representing the loss stock can be considered to be

• a notional asset that would be liquidated through sale and/or insurance realisation.
• a notional loss which may be reduced through sale and/or insurance realisation of the loss stock.

• Debit - __ Loss a/c

  Nominal
  ↓
  Debit
  {all expenses & losses}

  The notional loss represented by the relevant loss account

  Or

  Real
  ↓
  Debit
  {what comes in}

  The notional asset being created would be coming in.

  Note

  • Debit - Distinct Loss a/c

    To derive greater information relating to losses.

  • Debit - Combined Loss a/c

    To minimise information derived relating to losses.

• Credit - Consignment a/c

  Nominal
  ↓
  Credit
  {all incomes & gains}

  The value of loss taken away, by transferring a debit balance, from consignment a/c to the account representing the loss.

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

  Reduction of charge is an equivalent of an increase in income or gain.

Journal

1. Normal Loss

   Normal Loss a/c To Consignment a/c	Dr	500	500
   [For the value of normal loss in transit]
   Normal Loss a/c To Consignment a/c	Dr	450	450
   [For the value of normal loss in storage]

   • Opting to derive greater information

     Normal Loss in Transit a/c To Consignment a/c	Dr	500	500
     Normal Loss in Storage a/c To Consignment a/c	Dr	450	450

2. Abnormal Loss

   Loss in Transit a/c To Consignment a/c	Dr	5,675	5,675
   [For the value of abnormal loss in transit]
   Loss in Storage a/c To Consignment a/c	Dr	2,425	2,425
   [For the value of abnormal loss in storage]

   • Opting to derive greater information

     Abnormal Loss in Transit a/c To Consignment a/c	Dr	5,675	5,675
     Abnormal Loss in Storage a/c To Consignment a/c	Dr	2,425	2,425

   • Opting to derive lesser information

     Abnormal Loss a/c To Consignment a/c	Dr	5,675	5,675
     Abnormal Loss a/c To Consignment a/c	Dr	2,425	2,425

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

  Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Normal Loss By Loss in Transit By Normal Loss By Loss in Storage	500 5,675 450 2,425

  Normal Loss a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Consignment To Consignment	500 450

  Loss in transit a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Consignment	5,675

  Loss in Storage a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Consignment	2,425

• Opting to derive greater information

  Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Normal Loss in Transit By Abnormal Loss in Transit By Normal Loss in Storage By Abnormal Loss in Storage	500 5,675 450 2,425

  Normal Loss in Transit a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Consignment	500

  Normal Loss in Storage a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Consignment	450

  Abnormal Loss in transit a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Consignment	5,675

  Abnormal Loss in Storage a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Consignment	2,425

• Opting to derive lesser information

  Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Normal Loss By Abnormal Loss By Normal Loss By Abnormal Loss	500 5,675 450 2,425

  Normal Loss a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Consignment To Consignment	500 450

  Abnormal Loss a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Consignment To Consignment	5,675 2,425

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. 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.

Thus, the consignee does not record this transaction in his books of accounts.