Accounting Treatment for Normal Loss And Abnormal Loss In Consignment

Normal Loss In Consignment

What is Normal Loss?

·         unavoidable, inherent and to natural causes like evaporation, leakage, drying, etc

Accounting Treatment of Normal Loss In Consignment

• consider as part of cost of goods hence when computing the value of stock on consignment, the cost is inflated to cover the normal loss.

• This is done by appropriating the cost on the basis of actual quantity available for sale.

• Value of stock on consignment:

Cost of goods consigned X Unsold Quantity

           Actual quantity available for sale

Abnormal Loss In Consignment

What is Abnormal Loss?

·         Avoidable loss as it does not arise due to the nature of goods

·         Caused by theft, accident, fire, pilferage, abnormal breakages, carelessness, etc

Accounting Treatment Of Abnormal Loss In Consignment

• Computed the same way as the valuation of stock on consignment after taking into consideration the proper expenses incurred on it.

The value of loss is treated as follows:

• Debit: Abnormal Loss

• Credit: Consignment Account

If the stock is insured, the accounting entries of the actual insurance amount claimed is as follows:

• Debit: Insurance Company

• Credit: Abnormal loss a/c

Any amount realized on account of damaged goods should also be credited to abnormal loss account.

The balance in abnormal loss account is debited to Income Statement.

Upon receipts from the insurance company, cash account is debited and insurance company being credited.