Recording the value of Normal and Abnormal Losses

Losses - Normal/Abnormal

The consignee would be the first person to know of the losses, except in the case of loss in transit where there is a possibility of the consignor knowing about the loss first.

Valuation of Losses

The consignor on knowing the loss in quantitative terms would value the loss based on the information relating to the value of goods consigned and the expenses paid by him as well as the direct expenses paid by the consignee.

Valuation of loss is an act that is distinct from recording the losses in the books of accounts.

Point of occurrence of Losses

The accounting treatment of normal loss and abnormal loss is not dependent on the point at which the loss arises. The fact that the loss has occurred in transit or in storage would be relevant for valuation of the loss only and not for their accounting treatment.

The information relating to the loss is capable of being conveyed by the consignee and received by the consignor at any time during the year. Specifically with regard to abnormal loss the information is passed on to enable insurance claim to be made in time by the consignor. Therefore recording of normal and abnormal losses is done as and when the information relating to the same is received by the consignor.

Loss accounts - Number and names

The number of ledger accounts used for deriving information relating to losses is dependent on the information needs of the organisation.

  • Deriving maximum possible information

    To derive the maximum possible information relating to losses, a separate account for each loss is maintained.

    To loss accounts are named to enable distinct identification.

    • Normal Loss in Transit a/c
    • Normal Loss in Storage a/c
    • Abnormal Loss in Transit a/c
    • Abnormal Loss in Storage a/c
  • Minimise information derived

    To minimise the derivation of information relating to losses, a single loss account for each type of loss is maintained.

    To loss accounts are named based on type of loss

    • Normal Loss a/c, for all normal losses
    • Abnormal Loss a/c, for all abnormal losses
  • Conventionally

    The idea of maintaining distinct ledger accounts for each loss may not be of much use in the case of normal losses and as such a single normal loss account and distinct ledger accounts for each abnormal loss may be maintained.

    Since there would be only one account for recording normal losses, it is named Normal Loss a/c.

    The abnormal loss accounts are named with the terms indicating the nature of loss, skipping the use of the word Abnormal in the account name.

    • Normal Loss a/c
    • Loss in Transit a/c
    • Loss in Storage a/c

Transaction

Example

  1. value of normal loss in transit 500
  2. value of abnormal loss in transit 5,675
  3. value of normal loss in storage 450
  4. value of abnormal loss in storage 2,425

Since we are dealing with recording the transactions, we are assuming that the valuation has been done.

Consignor's Books

Dr/Cr - Transaction analysis

Consignment account is charged with the value of goods consigned and thus includes the value of loss stocks also.

Loss stocks are stocks not used for consignment. Their value has to be taken away from the consignment account thereby reducing the charge on consignment a/c. This is done by transferring a debit balance equal to the value of the loss stock to an account representing the loss stock.

The account representing the loss stock can be considered to be

  • a notional asset that would be liquidated through sale and/or insurance realisation.
  • a notional loss which may be reduced through sale and/or insurance realisation of the loss stock.
  • Debit - __ Loss a/c

    Nominal

    Debit
    {all expenses & losses}

    The notional loss represented by the relevant loss account

    Or

    Real

    Debit
    {what comes in}

    The notional asset being created would be coming in.

    Note

    • Debit - Distinct Loss a/c

      To derive greater information relating to losses.

    • Debit - Combined Loss a/c

      To minimise information derived relating to losses.

  • Credit - Consignment a/c

    Nominal

    Credit
    {all incomes & gains}

    The value of loss taken away, by transferring a debit balance, from consignment a/c to the account representing the loss.

    From To To Transfer Entry
    A B Debit Balance Dr. B
    Cr. A
    Credit Balance Cr. B
    Dr. A

    Reduction of charge is an equivalent of an increase in income or gain.

Journal

  1. Normal Loss

    Normal Loss a/c
    To Consignment a/c
    Dr
    500
    500
    [For the value of normal loss in transit]
    Normal Loss a/c
    To Consignment a/c
    Dr
    450
    450
    [For the value of normal loss in storage]
    • Opting to derive greater information

      Normal Loss in Transit a/c
      To Consignment a/c
      Dr
      500
      500
      Normal Loss in Storage a/c
      To Consignment a/c
      Dr
      450
      450
  2. Abnormal Loss

    Loss in Transit a/c
    To Consignment a/c
    Dr
    5,675
    5,675
    [For the value of abnormal loss in transit]
    Loss in Storage a/c
    To Consignment a/c
    Dr
    2,425
    2,425
    [For the value of abnormal loss in storage]
    • Opting to derive greater information

      Abnormal Loss in Transit a/c
      To Consignment a/c
      Dr
      5,675
      5,675
      Abnormal Loss in Storage a/c
      To Consignment a/c
      Dr
      2,425
      2,425
    • Opting to derive lesser information

      Abnormal Loss a/c
      To Consignment a/c
      Dr
      5,675
      5,675
      Abnormal Loss a/c
      To Consignment a/c
      Dr
      2,425
      2,425

Ledger

One of the following sets of accounts will appear in the ledger depending on the choice made relating to the quantum of information that the accounting system has to provide.

  • Normally

    Consignment a/c
    Dr Cr
    Particulars Amount Particulars Amount

    By Normal Loss
    By Loss in Transit
    By Normal Loss
    By Loss in Storage

    500
    5,675
    450
    2,425
    Normal Loss a/c
    Dr Cr
    Particulars Amount Particulars Amount

    To Consignment
    To Consignment

    500
    450


    Loss in transit a/c
    Dr Cr
    Particulars Amount Particulars Amount

    To Consignment

    5,675


    Loss in Storage a/c
    Dr Cr
    Particulars Amount Particulars Amount

    To Consignment

    2,425


  • Opting to derive greater information

    Consignment a/c
    Dr Cr
    Particulars Amount Particulars Amount

    By Normal Loss in Transit
    By Abnormal Loss in Transit
    By Normal Loss in Storage
    By Abnormal Loss in Storage

    500
    5,675
    450
    2,425
    Normal Loss in Transit a/c
    Dr Cr
    Particulars Amount Particulars Amount

    To Consignment

    500


    Normal Loss in Storage a/c
    Dr Cr
    Particulars Amount Particulars Amount

    To Consignment

    450


    Abnormal Loss in transit a/c
    Dr Cr
    Particulars Amount Particulars Amount

    To Consignment

    5,675


    Abnormal Loss in Storage a/c
    Dr Cr
    Particulars Amount Particulars Amount

    To Consignment

    2,425


  • Opting to derive lesser information

    Consignment a/c
    Dr Cr
    Particulars Amount Particulars Amount

    By Normal Loss
    By Abnormal Loss
    By Normal Loss
    By Abnormal Loss

    500
    5,675
    450
    2,425
    Normal Loss a/c
    Dr Cr
    Particulars Amount Particulars Amount

    To Consignment
    To Consignment

    500
    450


    Abnormal Loss a/c
    Dr Cr
    Particulars Amount Particulars Amount

    To Consignment
    To Consignment

    5,675
    2,425


Consignees Books

The ownership of the goods is with the consignor. He takes all the risks and returns on consignment

The loss on account of any normal or abnormal reasons would also be borne by the consignor himself. The consignee would bear no part of the loss. Therefore, only the consignor finds the need to value and record either the normal loss or the abnormal loss.

Thus, the consignee does not record this transaction in his books of accounts.