# Normal Loss :: Accounting Treatment

 Normal Loss » Related Quantities & Values

 Quantity(Units) Value(Rs.) Rate(Rs./Unit) Gross Input 1,000 1,00,000 100 Less: Normal Loss 100 100 1 Net Output 900 99,900 111

The normal loss in quantity terms should be deducted from the gross input to obtain the Normal (net) Output
[Normal Output = Gross Input − Normal Loss Units]

The net realisable value of normal loss should be deducted from the total cost to obtain the Normal (net) Cost.
[Normal Cost = Total Cost − Normal Loss Realisation].

## Caution

The rate column is always to be obtained as a quotient using the relation Value ÷ Quantity.

 Normal Loss » Accounting Treatment
Total Cost is debited to the Process a/c. Value of normal loss is deducted from the total cost to obtain the normal cost.

Deducting from the debit side item is the same as Crediting the Item.

Therefore, "Normal Loss" both in terms of units and value is recorded by

• Crediting the "Process " a/c and
• Debiting the "Normal Loss a/c"

The units are also shown along with it in the relevant column.

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
30/06/2006 Dr 100
100

 Dr Process I a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)

To Input

1,000

1,00,000

By Normal Loss a/c
By Process II a/c

100
900

100
99,900
1,000 1,00,000   1,000 1,00,000

 Dr Normal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)

To Process I a/c

100

100

 Disposal/Sale of Normal Loss Stock
 In recording the value of normal loss we can assume that we are creating an asset by the name "Normal Loss". The value of this asset is equal to the realisable value of normal loss. This value is an estimated (notional) value. The actual amount realised by sale of normal loss stock may be equal to, more than or less than its notional value. Thus, on disposal of normal loss stock there may be (a) Gain (b) Loss and (c) Neither Gain nor Loss

 Profit on Disposal/Sale of Normal Loss Stock
There would be a gain on the sale/disposal of normal loss stock, when the actual amount realised/realisable on its sale is more than its notional value.

Assume that of the 100 Normal Loss units, 80 units are sold for Rs. 120 (80 units × Rs. 1.50/unit)

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
xx/xx/20xx Dr
120
120
30/06/2006 Dr
40
40

 Dr Normal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process I a/c
To Costing P&L a/c
100
100
40
By Cash/Bank/Drs a/c
By bal c/d
80
20
120
20
100 140   100 140
To bal b/d 20 20

 Dr Costing Profit & Loss a/c Cr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)

By Normal Loss a/c

40

## Note

1. Profit or loss is assessed by taking only the value of 80 units into consideration.

Profit = Rs. 40 (80 units × Rs. 1.50/unit) − (80 units × Rs. 1/unit)

2. Since only 80 units are sold, the value of the other 20 units would be retained in the Normal Loss a/c, till they are disposed.
3. At the end of the accounting period, these would be shown in the balance sheet as assets or by making any other appropriate adjustments to stock values.

# Alternative [Less Preferable]

The above two journal entries can be combined into a single simple compound/combined journal entry as

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
xx/xx/20xx Dr

120
80
40

 Dr Normal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process I a/c
100
100
By Cash/Bank/Drs a/c
By bal c/d
80
20
80
20
100 100   100 100
To bal b/d 20 20

The disadvantage being the absence of the information relating to profit in the normal loss account.

 Dr Costing Profit & Loss a/c Cr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)

By Cash/Bank/Drs a/c

40

 Loss on Disposal/Sale of Normal Loss Stock
There would be a loss on the disposal/sale of normal loss stock, when the actual amount realised/realisable on its sale is less than its value.

Assume that the 100 Normal Loss units are sold for Rs. 90 (100 units × Rs. 0.90/unit)

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
30/06/2006 Dr

90
10

100

 Dr Normal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process I a/c
100
100
By Cash/Drs a/c
By Costing P&L a/c
100
90
10
100 100   100 100

 Dr Costing Profit & Loss a/c Cr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)

To Normal Loss a/c

10

## Note

1. Profit or loss is assessed by taking the value of all the 100 units into consideration since all of them are disposed off.

Loss = Rs. 10 (100 units × Rs. 0.90/unit) − (100 units × Rs. 1/unit)

2. Since all the units are sold, there would be no value left in the normal loss account.
3. At the end of the accounting period, there would be no asset (named Normal Loss) to be shown in the balance sheet.

# Alternative

The above journal entry can be broken down into two entries as

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
30/06/2006 Dr
90
90
30/06/2006 Dr
10
10

The Ledger postings would be the same, whether you record a single journal entry or two entries.

There is no inconvenience in adopting this method except for the fact that it needs you to record an additional journal entry.

 Disposal/Sale of Normal Loss Stock without Gain/Loss
There would be no loss or gain on the disposal/sale of normal loss stock, when the actual amount realised/realisable on its sale is equal to its value.

Assume that the 40 Normal Loss units are sold for Rs. 40 (40 units × Rs. 1/unit)

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
30/06/2006 Dr 40
40
 Dr Normal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process I a/c
100
100
By Cash/Drs a/c
By bal c/d
40
60
40
60
100 100   100 100
To bal b/d 60 60

40 units sold at Rs. 1.00 each i.e. for Rs. 40 (= 40 units × Rs. 1.00/unit)

 Influence of Losses on Costs
In arriving at the cost of manufacturing a product or service, only normal costs are to be considered as being part of cost. The costs should not be influenced by abnormal natured losses and costs.

Therefore the value of losses should be eliminated from the total costs.

Since all costs are debited to the process account, eliminating a value implies either deducting from the debit side or crediting the process account with the value.

 Dr Process I a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)

To Input
[Includes Normal Loss:
100 units; Cost : 10,000]

1,000

1,00,000
By Normal Loss a/c

By Bal c/d
[Includes Normal Loss:
0 units Cost : 9,900]
100

900
100

99,900
1,000 1,00,000   1,000 1,00,000
To bal b/d 900 99.900

With regard to normal loss, it is accepted that the value other than its realisable value (i.e. the difference between the actual cost of normal loss stock and its realisable value) should be borne by good production.

This means that the unrealisable value of normal loss stock (Rs. 9,900) is accepted as normal cost. Therefore we eliminate only the realisable value (Rs. 100) of the normal loss stock from the process account.

In the above case, Rs. 100 being the value of normal loss is eliminated from the process account and the rest of the cost of normal loss stock i.e. Rs. 9,900 is absorbed by the process account.

 Author Credit : The Edifier ... Continued Page 6