Valuation and Treatment Treatment of Normal and Abnormal Loss in Consignment Accounting: Learning Objectives:
1. How are are the normal normal and and abnormal abnormal losses losses are calculated and treated treated in consignment accounting?
Normal Loss: Normal loss of goods should also be considered while valuing the closing stock or unsold stock. Normal loss means inherent and unavoidable loss. For example if a certain quantity of coal is consigned, some of it is bound to be lost because of loading and unloading and because of some of it turning into dust. In the nature of coal shortage is unavoidable.
Example: Suppose 100 tons of coal are despatched. The cost of one ton of coal is $20 and the freight incurred is $470. To the consignor the total cost is $2,470. Suppose, the consignee receives only 95 tones. In that case the consignor can say that the cost of one ton of coal is $2,470/95 or $26. If 20 tons of coal are left unsold with the consignee, the value of stock will be $20 × $26 = $520.
Abnormal Loss: Some losses are accidental or may arise out of carelessness. For example, theft of goods or destruction of goods by fire. Such losses are more or less abnormal and in any case, do not occur often. Suppose part of the goods stolen. This will reduce the value of stock and, therefore, the profit on consignment. In order to see the effect of theft clearly, it is better to find out the value of the goods thus lost. After finding out the value, the consignment account is credited and profit and loss account is debited. The effect of this will be that the consignment account will show its proper profit and in the profit and loss account this profit will be reduced to show actual profit. If part of the loss is recoverable from an insurance company, company , the amount which can be recovered should be deducted from the loss for the purpose of debiting the profit and loss account. The amount of the loss should be calculated like stock on consignment. consignment .
Example/Problem of Abnormal Loss: 1,000 Motors were consigned by A & Co., of Lahore to Bashir of Karachi at an invoice cost of $150 each. A & Co., paid freight $10,000 and insurance $1,500. During transit 100 motors were completely destroyed. Bashir took delivery of the remaining motors and paid $14,400 as duty. Bashir sent a bank draft to A & Co., for $50,000 as an advance payment and later sent an account sale showing that 800 motors were sold at $220 each. Expenses incurred by
Bashir on godown rent and advertisement etc., amounted to $2,000. Bashir is entitled to commission of 5 per cent. Required: Prepare consignment account and Bashir's account in the books of A & Co., assuming that nothing has been recovered from the insurance company due to defect in the policy. Consignment to Karachi Account $
$
To Goods sent on consignment
1,50,000
To Bank - freight and insurance
11,500
By Profit and loss account - Ab. Loss*
16,150
To Bashir - duty
14,400
By Stock on consignment**
17,750
To Bashir - expenses
2,000
To Bashir - commission
8,800
To Profit and loss account
By sales (800 × 220)
1,76,000
23,200
2,09,900
2,09,900
Bashir
$ To Consignment account
1,76,000
$ By Bank
50,000
By Consignment account Duty Expenses
14,400 2,000 16,400
By Consignment account-commission By Balance c/d
1,76,000
8,800 1,00,800
1,76,000
Working Note: (1)
*Calculation of abnormal loss: 100 motors at $150 each Add 100/1000 of freight and insurance (11,500 × 100/1000)
Abnormal loss
(2)
$15,000 1,150
16,150
**Calculation of Closing Stock: 100 motors at $150 each
$15,000
Add 100/1000 of freight and insurance (11,500 × 100/1000)
1,150
100/900 of duty
1,600
Closing stock or unsold stock
17,750
