Expenses incurred on Normal/Abnormal Loss Stocks

The normal or abnormal loss stocks may be in such a state that some expenditure may have to be incurred to make them congenial for realisation. Expenses on Abnormal Loss Stocks Since the value of the abnormal loss stock is eliminated from the consignment account and placed in a separate account "Abnormal Loss a/c" treating it as an asset, any expenditure that is incurred on this stock should be treated as expenditure that increases the value of the abnormal loss stock. This expenditure is necessarily incurred to either salvage the stock or repair the stock to bring it into a saleable condition. This expenditure is incurred only if the amount realised after incurring the expenditure would be more than the amount realised had the stock been sold as it is. Expenses on Normal Loss Stocks With regard to the normal loss stock, the expenditure is classified as: Normal Expenditure Expenditure that is incurred every time the normal loss stock arises is normal expenditure. Eg: The expenditure incurred for separating the normal loss stock from the good stock. Consignment a/c should reveal profit that is normal i.e. after taking into account all the costs and losses that are normal. Therefore, this expenditure which is also normal is also borne by the consignment account. Abnormal Expenditure The Expenditure that is borne only on some occasions is abnormal expenditure. This may be incurred in anticipation of realising a greater amount through the sale of the normal loss stock. Eg: Where a customer who buys the normal loss stock asks for certain modifications, the expenditure incurred is abnormal expenditure. Consignment a/c should reveal profit that is normal i.e. after taking into account all the costs and losses that are normal. Since this expenditure is abnormal it should not be charged to the consignment a/c. But the expenditure incurred would increase the value of the Normal Loss as an asset. Therefore, this expenditure is charged to the Normal Loss a/c. Who pays these expenses? These expenses on the normal loss stocks or abnormal stocks are paid by either the consignor or the consignee. Moreover, the expenditure may be paid in cash or through a cheque or may have been incurred and not yet paid i.e. outstanding. 19. June 26th: For the abnormal expenditure incurred on the normal loss (in transit) stock by the consignor Rs. 150. 20. June 26th: For the expenditure incurred on the abnormal loss (in transit) stock by the consignor Rs. 150. 21. June 26th: For the normal expenditure incurred on the normal loss (in storage) stock by the consignee Rs. 50. 22. June 26th: For the expenditure incurred on the abnormal loss (in storage) stock by the consignee Rs. 250. Consignor's Books Hide/Show Accounts Effected by the Transaction » Identification & Analysis: Debit » 19: Normal Loss a/c The expenditure on the normal loss stock being abnormal should go into the value of the normal loss stock i.e. it should be debited to the "Normal Loss a/c". [Normal Loss a/c – Real a/c – Debit .... ] 20, 22: Abnormal Loss a/c The expenditure on the abnormal loss stock whether it is normal or abnormal should go into the value of the abnormal loss stock i.e. it should be debited to the "Abnormal Loss a/c". [Abnormal Loss a/c – Real a/c – Debit .... ] 21: Vijayawada Consignment a/c The expenditure on the normal loss stock being normal should be charged to the consignment account. i.e. it should be debited to the "Consignment a/c". [Consignment a/c – Nominal a/c – Debit all expenses and losses.] Credit » 19, 20: Since the expenditure is incurred by the consignor it should be credited to the Cash a/c If the expenditure had been paid in cash [Cash a/c – Real a/c – Credit what goes out.] Bank a/c If the expenditure had been paid by cheque [Bank a/c – Personal a/c – Credit the benefit giver.] Outstanding Expenses a/c If the expenditure had been incurred and outstanding [Outstanding Expenses a/c – Personal a/c – Credit the benefit giver.] Note: Any nominal account prefixed/suffixed by the terms outstanding, prepaid, still receivable, still payable etc., is a personal account and not a nominal account 21, 22: M/s Maruthi Traders a/c Since the expenditure is incurred by the consignee he stands in the position of the benefit giver. Therefore, the consignee account should be credited. [Consignee a/c – Personal a/c – Credit the benefit giver.] The effect of the transactions can be summarised as 19 : (i) Normal Loss a/c and (ii) Cash/Bank/Outstanding Expenses a/c 20 : (i) Abnormal Loss a/c and (ii) Cash/Bank/Outstanding Expenses a/c 21 : (i) Normal Loss a/c and (ii) Consignee a/c 22 : (i) Abnormal Loss a/c and (ii) Consignee a/c   Dr Normal Loss a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs) 30/06/05       To Cash a/c (19) (Or) Bank a/c (Or) Out. Exp a/c   –       150       Note: Generally, there will be only one normal loss account to record all normal losses. However if the organisation in need of greater information is maintaining separate normal loss accounts for each instance of the loss, the expenditure should be charged to the relevant account.   Dr Vijayawada Consignment a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs) 30/06/05   To M T a/c (21)   –   50     Dr Abnormal Loss a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs) 30/06/05 30/06/05   To Cash a/c (20) (Or) Bank a/c (Or) Out. Exp a/c To M T a/c (22)   – –   150 250     Dr M/s Maruthi Traders a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs) 30/06/05 30/06/05   By Vij. Con a/c (20) By Ab. Loss a/c (22)   – –   50 250     Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) June 30th – Normal Loss a/c       To Cash a/c (Or)     Bank a/c (Or)     Outstanding Expenses a/c [For the expenditure of an abnormal nature incurred by the consignee on the normal loss stock.] Dr – – 150 150 June 30th – Abnormal Loss a/c       To Cash a/c (Or)     Bank a/c (Or)     Outstanding Expenses a/c [For the expenditure incurred by the consignor on the abnormal loss stock.] Dr – – 150 150 June 30th – Vijayawada Consignment a/c       To M/s Maruthi Traders a/c [For the expenditure of a normal nature incurred by the consignee on the normal loss stock.] Dr – – 50 50 June 30th – Abnormal Loss a/c       To M/s Maruthi Traders a/c [For the expenditure incurred by the consignee on the abnormal loss stock.] Dr – – 250 250 Consignees Books Hide/Show Accounts Effected by the Transaction » Identification & Analysis: The ownership of the goods is with the consignor. The consignee is no way connected to the ownership of the goods. The consignee therefore will not record any loss in the value of goods in his books of accounts. However since the consignee has spent some amounts on behalf of the consignor he will have to record the transactions involving the consignee. Debit » 21, 22: M/s Innova Steels a/c The expenditure being incurred on behalf of the consignor, the consignor stands in the position of the benefit receiver. Therefore the consignor account is to be "Debited" [Consignor a/c – Personal a/c – Debit the benefit receiver.] Credit » 21, 22: Since the expenditure is incurred by the consignee it should be credited to the Cash a/c If the expenditure had been paid in cash [Cash a/c – Real a/c – Credit what goes out.] Bank a/c If the expenditure had been paid by cheque [Bank a/c – Personal a/c – Credit the benefit giver.] Outstanding Expenses a/c If the expenditure had been incurred and outstanding [Outstanding Expenses a/c – Personal a/c – Credit the benefit giver.] Note: Any nominal account prefixed/suffixed by the terms outstanding, prepaid, still receivable, still payable etc., is a personal account and not a nominal account The effect of the transactions can be summarised as 21 : (i) Consignor a/c and (ii) Cash/Bank/Outstanding Expenses a/c 22 : (i) Consignor a/c and (ii) Cash/Bank/Outstanding Expenses a/c   Dr M/s Innova Steels a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs) 30/06/05     30/06/05   To Cash a/c (19) (Or) Bank a/c (Or) Out. Exp a/c To Cash a/c (22) (Or) Bank a/c (Or) Out. Exp a/c   –     –       50     250

Author Credit : The Edifier

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