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Normal and Abnormal Loss in Consignment Sales:

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Learning objectives of this article:
  1. What is difference between normal and abnormal loss?
  2. What is accounting treatment for normal and abnormal losses in consignment sales?

Normal and Abnormal Losses:

Sometime a part of the goods sent on consignment is damaged or lost. Damages or losses normal in transporting and handling goods. A loss may be a normal loss or abnormal loss.

Normal Loss:

Loss of quantity of goods in the normal course of business and inherent and thus inevitable or unavoidable, such as loss because of loading and unloading of goods, leakage, evaporation or shrinkage is known as normal loss.

The treatment of normal loss is to charge it to consignment account. The total cost of goods sent is charged to the units remaining. Value of stock is inflated to cover the normal loss. In other words such loss is absorbed by the remaining units.

Example:

2000 radio sets are consigned @ $300 per radio set. Freight being $1000. Due to a normal loss only 1960 radio sets  are received by the consignee. If 500 radio sets are in stock (i.e unsold sets), the value of closing stock would be calculates as follows:

normal loss calculation

No separate entry is made in the books of consignor in case of normal. such loss is considered while calculating the cost of stock left unsold with the consignee. The value of unsold stock on consignment is increased because the value of stock is the proportion of the cost of the goods consigned and direct expenses that the quantity of stock bears to the total quantity of goods consigned as diminished by the normal loss of goods. In brief, valuation of stock will be made:

value of unsold stock on consignment

Abnormal Loss:

This type of loss is an avoidable loss because it does not arise due to the nature of the goods. Such loss may arise due to hard luck of consignor (i.e. destruction of goods by fire, an accident or theft). Such losses are more or less abnormal and, in any case, do not occur frequently. This type of loss does not effect the value of goods and if part of the consignment has been lost in such a manner, one should debit the value of the goods lost to abnormal loss account/profit and loss account. and credit the consignment account so that one may judge the profitability of the consignment properly. In case, if this loss is ignored like normal loss, the the profit shown by the consignment account will be lower than what it would have been, had the loss not occurred. So, we let the consignment account show the same result as the loss had not been taken place. On the preparation of the final accounts of the business (trading and profit and loss account), this loss is finally shown on the debit side of the profit and loss account being a loss of the business as a whole.

Example:

On 1st January 2010, Z & Co. of New York consigned 100 cases of dry milk to T & Co. of Chicago. The goods were charged at a Performa invoice value of $10,000 including a profit of 25% on cost. On the same date the consignor paid $600 for freight and insurance. On 1st July, the consignee paid clearing charges $1,000, carriage $200. On 1st August consignee sold 80 cases for $10,500 and sent a remittance for the balance due to the consignor after deducting commission at the rate of 5% on gross sale proceeds.

Required: prepare consignment account and T & Co. account in the books of Z & Co.

Solution:

Consignment Account

Date

Particulars

Amount Date

Particulars

Amount
2010     2010    
Jan.1 Goods sent on consignment A/C 10,000 Jan.1 Goods sent on consignment A/C 2,500
  Bank A/C (freight and insurance) 600 Aug.1 T & Co. (sales) 10,500
July.1 T & Co.     Stock on consignment 2,360
    Clearing charges 1000        
    Carriage               200        
    Commission         525     1,725      
           
  Stock reserve A/C 500      
  Profit trf. to General P&L A/C 2,535      
   
   
    15,360     15,360
   
   
           

T & Co. Account

Date

Particulars

Amount Date

Particulars

Amount
2010     2010    
Aug.1 Consignment to Chicago A/C - sales 10,500 July.1 Consignment to Chicago A/C - exp. & commission 1,725
      Aug.1 Bank A/C - final payment  
          8,775
   
   
    10,500     10,500
   
   
           
           

Working Notes:

(i) Loading on goods sent on consignment 25% on $10,000. 2,500
(ii) Loading on closing stock 25% on $2,000. 500
(iii) Direct expenses included in valuation of closing stock 1/5 of $1,800 360
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More study material from this topic:

Account Sales
Difference between consignment and sales
Journal entries in the books of consignor
Valuation of closing/unsold stock in consignment business
Invoicing goods at a price higher than cost price

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


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  Transactions and Accounting Equation
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  Journal, Ledger and Trial Balance
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 
 

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