Normal loss of stock is also an accounting transaction and has to be brought into the books of accounts through a journal entry.

• Debit - Asset a/c

  Normal loss stock is an asset whose value is almost depleted. The organisation would make efforts to realise this asset by selling it, if at all it has a realisable value.

  An account by name Normal Loss is used for holding the value of this asset. This asset is created by debiting the value of normal loss stock to the Normal Loss a/c.

  Normal Loss a/c ↓ asset ↓ Real a/c ↓ Debit [Debit what comes in]

  Treating the Normal Loss a/c as a nominal account representing a loss is also rational, especially in cases where there is no possibility of recovering any of the value by sale or otherwise.

  We are considering it to be a real account to enable an easier understanding of the transactions involving normal loss stocks.

  All normal losses may be handled through a single account or a distinct account for each loss may be maintained. Where multiple accounts are being used names indicating the reason for the loss like Normal Loss on Wastage, Normal Loss on Weight Loss, etc. are used to give a better understanding,

• Credit

  The value of normal loss stock represents the value of stock that been used for purposes other than trading or more appropriately stock that has not been used for trading.

  Normal loss is valued at net marketable price and not cost unlike abnormal loss which is valued at cost.

  To ascertain the cost of goods sold, the value of stock used for purposes other than trading has to be deducted from the total value of goods by crediting one of the following ledger accounts.

  • Trading a/c
  • Cost of Goods Sold a/c
  • Purchases a/c
  • Normal Stock Loss a/c

  Which account is credited is dependent on which account has to absorb the difference between the cost value and realisable value of normal loss stock.

It would be appropriate to adjust the value of goods used for purposes other than trading from the account that holds the total value of goods. The total value of goods can be assumed to be existing as a debit balance in the Trading a/c to which all direct expenses are transferred at the end of the accounting period or in the Cost of Goods Sold a/c if it is being maintained and all the direct expenses are being transferred to it.

The value of goods used for purposes other than trading are to be deducted from the total value of goods (along with the value of good unsold) in arriving at the cost of goods sold. Since the total value exists as a debit balance, deducting from the total value requires the account holding the total value to be credited.

Thus the value of normal loss stock has to be credited to the Trading a/c or the Cost of Goods sold a/c in which the total value of goods/stock is existing as a debit balance.

Credited to Trading a/c

Journal

Particulars		Amount (Dr)	Amount (Cr)
Normal Loss a/c To Trading a/c	Dr	1,200	1,200
[For the value of normal loss stock]

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
–	To Trading a/c	1,200	–	–	–

Trading a/c

DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Purchases To Direct Expenses To Gross Profit	– – – –	By Sales By Normal Loss By Closing Stock	– 1,200 –
	–		–

Credited to Cost of Goods Sold a/c

Journal

Particulars		Amount (Dr)	Amount (Cr)
Normal Loss a/c To Cost of Goods Sold a/c	Dr	1,200	1,200
[For the value of normal loss stock]

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
–	To Cost of Goods Sold a/c	1,200	–	–	–

Cost of Goods Sold a/c

DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Purchases To Direct Expenses	– – –	By Normal Loss By Closing Stock By Trading a/c	1,200 – –
	–		–

Adjusting the goods used for purposes other than trading from the Purchases a/c would be rational under this circumstance.

The stock lost is physically relatable to the stock that has been purchased during the current period.

Journal

Particulars		Amount (Dr)	Amount (Cr)
Normal Loss a/c To Purchases a/c	Dr	1,200	1,200
[For the value of normal loss stock]

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
–	To Purchases a/c	1,200	–	–	–

Purchases a/c

DrCr
Particulars	Amount	Particulars	Amount
– –	– – –	– By Normal Loss –	– 1,200 –
	–		–

During the accounting period

If the journal entry for recording the normal loss stock is being recorded any time during the accounting period, then Purchases a/c has to be credited since the Trading a/c and Cost of Goods sold a/c would not be available in the books of accounts as they are accounts that are created only towards the end of the accounting period.

If the organisation intends to maintain distinct information relating to the normal losses of stock all throughout the accounting period since it is a frequent occurrence, then a separate ledger account by name Stock Lost is maintained and all normal losses of stocks are credited to that account.

Journal

Particulars		Amount (Dr)	Amount (Cr)
Normal Loss a/c To Normal Stock Loss a/c	Dr	1,200	1,200
[For the value of normal loss of goods]

The Normal Stock Loss a/c is a nominal account which provides the information relating to the total value of normal loss of stock during the current accounting period. It's balance provides the answer to the question, "What is the total value of normal stock loss till now"? At the end of the accounting period, Normal Stock Loss a/c is closed by transfer to the Trading a/c or the Cost of Goods sold a/c or the Purchases a/c depending on which account has to absorb the difference between the cost value and realisable value of normal loss stock.

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
–	To Normal Stock Loss a/c	1,200	–	–	–

Normal Stock Loss a/c

DrCr
Particulars	Amount	Particulars	Amount
To Trading a/c	–	By Wastage By Normal Loss By Scrap	– 1,200 –
	–		–

The normal loss stock may be in a saleable condition or completely useless. There may be instances when the normal loss stock can be brought into saleable condition by bearing certain expenditure.

This expenditure may be paid in cash or by cheques or may have been incurred and not yet been paid.

• Debit - Normal Loss a/c

  The amount spent is for the purpose of bringing the normal loss stock into saleable condition. This would amount to brining the asset by name Normal Loss into usable condition. Thus, the expenditure should go into the value of the asset Normal Loss.

  The debit balance in the Normal Loss a/c reflects its value. To add the expenditure to the value, Normal Loss a/c is debited with the amount of expenditure incurred.

• Credit

  The expenditure incurred may be credited to

  • Cash a/c

    If the expenses are paid out in cash

  • Bank a/c

    If the expenses are paid by cheque

  • Expenses Payable a/c

    If the expenses are still to be paid
    Any nominal account prefixed/suffixed by the terms outstanding, prepaid, still receivable, still payable etc., is a personal account and is an equivalent of a debtor or a creditor.

    The personal account of the creditor is credited if it exists in the books of accounts or if the organisation intends to maintain information relating to the amount receivable from the specific creditor distinctly.

Journal in the books of M/s __ for the period from ____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Normal Loss a/c To Cash a/c	Dr	100	100
[For the amount spent on the normal loss stock to bring it into saleable condition paid in cash.]
Normal Loss a/c To Bank a/c	Dr	150	150
[For the amount spent on the normal loss stock to bring it into saleable condition paid by cheques.]
Normal Loss a/c To Expense Payable a/c	Dr	120	120
[For the expenditure incurred on the normal loss stock to bring it into saleable condition which is still payable.]

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
16/08/_5	To Purchases To Cash To Bank To Expense Payable	1,200 100 150 120	31/12/_5		–

The normal loss stock, if saleable, may be directly sold or after getting them repaired or refurbished.

The sale proceeds may be received in cash or by a cheques or may be still receivable

• Credit - Normal Loss a/c

  Since the asset represented by the Normal Loss a/c is being disposed off, it amounts to the asset moving out of the organisation.

  Thus the Normal Loss a/c is credited with the amount of sale realisation

• Debit

  The sale proceeds may be debited to

  • Cash a/c

    If the proceeds are received in cash

  • Bank a/c

    If the proceeds are received by cheques
    

  • Proceeds Receivable a/c

    If the proceeds are still to be received
    
    Any nominal account prefixed/suffixed by the terms outstanding, prepaid, still receivable, still payable etc., is a personal account and is an equivalent of a debtor or a creditor.

    The personal account of the buyer is credited if it exists in the books of accounts or if the organisation intends to maintain information relating to the amount receivable from the specific buyer distinctly.

Journal in the books of M/s __ for the period from ____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Cash a/c To Normal Loss a/c	Dr	400	400
[For the amount realised on the sale of normal loss stock in cash.]
Bank a/c To Normal Loss a/c	Dr	600	600
[For the sale proceeds of normal loss stock received through a cheques.]
Proceeds Receivable a/c To Normal Loss a/c	Dr	900	900
[For the sale of normal loss stock and the sale proceeds still receivable.]

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
16/08/_5	To Purchases a/c To Cash a/c To Bank a/c To Expenses Payable	1,200 100 150 120	–	By Cash By Bank By Pro. Rec	400 600 900

Consider the following notional data relating to an insurance policy issued by an insurance company for loss on theft.

a) Insurance premium per policy b) Value Insured per policy c) Number of policies sold d) Total premium collected (a) × (c) e) Claims received f) Total amount paid on claims g) Surplus (d) − (f)

200 100,000 50,000 100,00,000 500 80,00,000 20,00,000

Contract of Indemnity

A contract of general insurance (not life insurance) is a contract of indemnity.

Indemnify

• Secure against future loss, damage, or liability
• Pay compensation for
• compensate
• insure
• repair

The contract amounts to the insurance company saying we will make good the loss you incur on the contingency of a theft subject to a maximum of the policy value. It does not mean that we will pay you the policy value on the occurrence of the event.

Contingency

• A possible event, occurrence or result
• eventuality

In the above example, the payout if full for the 500 claims would be 500,00,000. The payout being 80,00,000 indicates that not all claims are paid out in full.

Insurance possible only for probable events

General insurance is offered only for events which may probably occur. The insurance company would have to pay up only if the event takes place. If the event does not occur the insurance company would benefit as it need not pay anything.

The insurance company would be making maximum profit when there are no claims. The more the claims the less the profit it makes. If all the insured are going to file a claim, then there is no scope for the insurance company to make a profit. It would be like making a promise that they will repay 1,00,000 within a year if the insured pays 500 now.

The premium charged for insuring is also set by the insurance company based on the probability of the event occuring, an estimate of the number of policies it can sell and number of claims that it anticipates to receive during the insured period.

Normal Loss is a certainity

The event of sustaining normal loss is a certainity and not a probabilty. If the insurance company insures loss on account of normal loss, then 100% of the insured would be filing a claim.

Thus, we cannot think of insurance for normal loss. when we talk of insurance of loss, we mean abnormal loss and not normal loss.

Where there is a commission being paid or payable on the sale of normal loss stock it may be

• Deducted from the sale proceeds received/receivable and only the net proceeds brought into account
• Recorded just like any other expenditure that goes into the value of the Normal Loss Stock

The Normal Loss a/c may carry a balance after having sold the stock.

If there is a debit balance it represents the amount of asset value that is unrealisable and as such a loss.

Though, it is a very rare occurrence, the Normal Loss a/c may carry a credit balance which indicates that the asset has realised a value greater than the book value, thereby resulting in a profit.

Whether there is a profit or a loss, it being of abnormal nature is transferred to the Profit & Loss a/c thereby closing the Normal Loss a/c.

When there is a gain

• Credit - Profit & Loss a/c

  Profit & Loss a/c being a nominal account, any profit should be credited to it.

  Profit & Loss a/c ↓ Nominal a/c ↓ Credit [Credit all incomes and gains]

• Debit - Normal Loss a/c

  When there is a gain, the Normal Loss a/c has a credit balance and has to be closed by transferring the balance to the Profit & Loss a/c.

  Thus the Normal Loss a/c has to be debited.

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

Journal in the books of M/s __ for the period from ____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Normal Loss a/c To Profit & Loss a/c	Dr	330	330
[For the gain in the normal loss account transferred to the profit and loss account.]

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
16/08/_5	To Purchases a/c To Cash a/c To Bank a/c To Expenses Payable To Profit & Loss a/c	1,200 100 150 120 330	–	By Cash By Bank By Proceeds Receivable	400 600 900
		1,900			1,900

Statement

A statement for ascertainment of the loss on disposal of normal loss stock can be made up by considering the credit side items as a unit and the debit side items as another.

Loss/Gain on Normal Loss Stock

Particulars	Amount	Amount
a) Realisation Sale Cash Bank Receivable	400 600 900	1,900
Total Realisation		1,900
b) Cost/Expenses Value of Stock Expenses Paid in Cash Paid by Cheque Outstanding Commission on Sale	100 150 120	1,200 370 –
Total Cost/Value		1,570
Gain(+)/Loss(−) (a) − (b)		+ 330

The ledger account format even as a part of the working notes would be useful.

When there is a loss

• Debit - Profit & Loss a/c

  Profit & Loss a/c being a nominal account, any loss should be debited to it.

  Profit & Loss a/c ↓ Nominal a/c ↓ Debit [Debit all expenses and losses]

• Credit - Normal Loss a/c

  The Normal Loss a/c has a debit balance and has to be closed by transferring the balance to the Profit & Loss a/c.

  Thus the Normal Loss a/c has to be credited.

  Normal Loss a/c ↓ Real a/c ↓ Credit [Credit what goes out]

  Normal Loss a/c carries a debit balance when there is a loss. Transfer of a debit balance from one account to a second results in the second account being debited and the first account being credited.

Journal in the books of M/s __ for the period from ____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Profit & Loss a/c To Normal Loss a/c	Dr	270	270
[For the net loss in normal loss account being transferred to the profit and loss account.]

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
16/08/_5	To Purchases a/c To Cash a/c To Bank a/c To Expenses Payable	1,200 100 150 120	–	By Cash By Bank By Proceeds Receivable By Profit & Loss a/c	400 600 300 270
		1,570			1,570

Receivable sale proceeds is taken as 300 instead of 900 to generate loss for the purpose of this example.

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e. towards the end of the accounting period.

The entries involved would be

• Dr. Normal Loss a/c
  Cr. Trading a/c
• If there are expenses incurred on normal loss stock

  Dr. Normal Loss a/c
  Cr. Expense Outstanding a/c

• If there are sale proceeds receivable

  Dr. Proceeds Receivable a/c
  Cr. Normal Loss a/c

• When there is net loss

  Dr. Profit & Loss a/c
  Cr. Normal Loss a/c

• When there is net profit

  Dr. Normal Loss a/c
  Cr. Profit & Loss a/c

Working notes for adjustments

Net Entry	Adjustment	Side	Where
Dr. Proceeds Receivable a/c Dr. Profit and Loss a/c Cr. Profit and Loss a/c Cr. Trading a/c Cr. Expense Outstanding a/c	1. (✔) as Debtor 2. (✔) as Normal Loss 2. (✔) as Normal Loss 3. (✔) as Normal Loss 4. (✔) as Expense Outstanding	Assets Debit Credit Credit Liabilities	B/S P/L P/L Trdg B/S

Read as

1. Show the amount receivable from the buyer of normal loss stock as a debtor on the assets side of the balance sheet.
2. This will be either a debit or credit depending on whether there is a loss or gain.

   Show the net loss on the debit side of the profit and loss a/c.

   Show the net gain on the credit side of the profit and loss a/c.

3. Show the value of normal loss stock on the credit side of the Trading a/c
4. Show the outstanding expense on normal loss stock on the liabilities side of the balance sheet.

Note

In handling transactions relating to normal loss as adjustment at the end of the accounting period, we assume that the proceeds are receivable, expenses are payable unless otherwise stated.

The number of elements affected is dependent on whether the transactions relating to expenses and sale have taken place or not.

Trading and Profit & Loss a/c

DrCr
Particulars	Amount	Particulars	Amount
		By Normal Loss	1,200
		By Normal Loss	330

Balance Sheet of M/s ______ as on 30^th June 20_6

Liabilities	Amount	Assets	Amount
Expenses Outstanding	120	Realisation Receivable	300

Recording the value of normal loss stock lost would result in the Normal Loss a/c or an account by any relevant name being created. In recording the transactions relating to expenses on the normal loss stock, sale realisations etc. relating to the normal loss stock, one of the ledger accounts affected would have to be this Normal Loss a/c.

However, where the journal entry for recording the value of normal loss stock has not yet been recorded, the Normal Loss a/c would not be found in the books of accounts. In such cases, the accountant might use some temporary account by relevant name to record the transaction.

In problem solving, such temporary accounts can be identified by their presence in the Trial Balance. They have to be cleared by using them in recording the entries relating to normal loss stock.

Expenses Paid

When expenses are paid, a temporary account, say by name Expenses on Normal Loss a/c may be used to record the expenditure incurred. If such an account is used, it would appear in the Trial Balance.

The Expenses on Normal Loss a/c has to be closed by transfer to the Normal Loss a/c. The expenditure should not be treated as indirect expenditure.

Journal in the books of M/s __ for the period from ____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Expenses on Normal Loss a/c To Cash a/c	Dr	100	100
[For the expenses on normal loss stock.]

• Bank a/c is credited if the payment has been made by a cheque.
• Outstanding Expenses a/c is credited if the payment is outstanding.

  The personal account of the service provider is credited if it exists in the books of accounts or if the organisation intends to maintain information relating to the amount due to the service provider distinctly.

Trial Balance of M/s _____ as on _____

Particulars	L/F	Amount (Dr)	Amount (Cr)
Expenses on Normal Loss	– – – – –	100

Journal in the books of M/s __ for the period from ____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Normal Loss a/c To Expenses on Normal Loss a/c	Dr	100	100
[For the expenses on normal loss stock absorbed.]

Expenses on Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
–	To Cash	100	31/12/_5	By Normal Loss	100
		100			100

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5 31/12/_5	To Trading a/c To Expenses on Normal Loss	1,200 100

Adjustment

Working notes for adjustments

Net Entry	Adjustment	Side	Where
Dr. Normal Loss a/c Dr. Expenses on Normal Loss a/c	1. (+) to Normal Loss 2. (×) closed	– –	– –

Sale Realisation

When sale proceeds are received, a temporary account, say by name Sale of Normal Loss a/c may be used to record the proceeds received/receivable. If such an account is used, it would appear in the Trial Balance.

The Sale of Normal Loss a/c has to be closed by transfer to Normal Loss a/c. This should not be treated as normal sale.

Journal in the books of M/s __ for the period from ____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Bank a/c To Sale of Normal Loss a/c	Dr	600	600
[For the amount received on the sale of normal loss stock.]

• Cash a/c is debited if the proceeds are received in cash.
• Proceeds Receivable a/c is debited if the proceeds are still receivable.

  The personal account of the buyer is credited if it exists in the books of accounts or if the organisation intends to maintain information relating to the amount receivable from the buyer distinctly.

Trial Balance of M/s _____ as on _____

Particulars	L/F	Amount (Dr)	Amount (Cr)
Sale of Normal Loss	– – – – –		600
Total

Journal in the books of M/s __ for the period from ____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Sale of Normal Loss a/c To Normal Loss a/c	Dr	600	600
[For the sale realisation of normal loss stock absorbed.]

Sale of Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To Normal Loss	600	–	By Bank	600
		600			600

Normal Loss a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To Trading a/c	1,200	31/12/_5	By Sale of Normal Loss	600

For the purpose of incorporating the same information as adjustment, the temporary account is assumed to have got exhausted and the proceeds are considered for ascertaining the profit or loss on normal loss stock.

Adjustment

Working notes for adjustments

Net Entry	Adjustment	Side	Where
Dr. Sale of Normal Loss a/c Dr. Normal Loss a/c	1. (×) closed 2. (−) from Normal Loss	– –	– –