CONSIGNMENT ACCOUNTS NOTES
QUESTION: Explain about treatment of Normal loss and Abnormal loss in the books of consignor with suitable examples.
Consignment is a specialized kind of transaction which involves the two parties i.e. Consignor and Consignee. In this the consignor dispatches the goods to the consignee and consignee is required to sell those goods. For this, the consignee gets a commission. Consignment is a nature of transaction that leads to the expansion of business. The legal relationship between the consignor and consignee is of the agent and the principal.
In consignment, the goods are to be sent from one place to the other. There is always a possibility of some kind of loss of stock. The consignor has to bear the loss, not the consignee. The Treatment of loss on consignment is for two types of losses:
- NORMAL LOSS
- ABNORMAL LOSS
ACCOUNTING FOR NORMAL LOSS
Normal loss is the loss that occurs due to the nature of the goods consigned. Its nature is as follows:
- It occurs due to unavoidable reasons.
- It is due to natural causes such as losses due to evaporation, normal leakage, spoilage, breakdown, drying etc.
- It forms the part of cost of goods sold.
- It is taken into account only when unsold stock is to be valued.
- It is not shown in the consignment account.
- No entry is passed in the books regarding the normal loss.
CALCULATION
Value of unsold stock= {Total cost of goods consigned/ (Total Quantity sent-quantity of normal loss)}*Unsold Quantity
EXAMPLE: Suppose 200 tons of coal is consigned @ Rs. 20 per ton, expenses being Rs. 400. If loss due to loading and unloading is 10 tons and if the quantity sold by the consignee is 152 tons, then the value of stock unsold (38 tons) will be as follows:
| Cost of 200 tons of coal | 4,000 |
| ADD: Expenses | 400 |
| Total cost of 200 tons | 4,400 |
The cost of 200 tons becomes the cost of 190 tons because of a normal loss of 10 tons.
Hence the cost of 190 tons= Rs. 4,400
Value of 38 tons of stock= (4,400/190)*38= Rs. 880
ACCOUNTING FOR ABNORMAL LOSS
Abnormal Loss may arise due to mishap, mischief and inefficiency. This loss is not natural and can be avoided with proper care. Its nature is as follows:
- It is unnatural and avoidable.
- It arises due to reasons like fire, riot, flood, theft, road accident etc.
- In case of abnormal loss, the value of stock is not inflated.
- It is calculated after taking into consideration the proportionate expenses incurred on it.
JOURNAL ENTRIES
WHEN GOODS ARE INSURED
| When abnormal loss is incurred Abnormal loss account Dr. To consignment account |
| When insurance company admits the claim Insurance claim account Dr. Profit and Loss Account Dr. To Abnormal Loss Account. |
| Receipt of Insurance Claim Bank A/c Dr. To Insurance company A/c or Insurance Claim A/c |
WHEN GOODS ARE NOT INSURED
| When abnormal loss is incurred Abnormal loss account Dr. To consignment account |
| Transfer of abnormal loss Profit and loss account Dr. To abnormal loss account |
CALCULATION OF ABNORMAL LOSS
STATEMENT SHOWING CALCULATION OF ABNORMAL LOSS DURING TRANSIT
| PARTICULARS | AMOUNT |
| Cost price of goods lost in transit | |
| ADD: Consignor’s proportionate expenses (Consignor’s total expenses/ total units sent)*units lost | |
| Cost of abnormal loss during transit (A+B) |
STATEMENT SHOWING CALCULATION OF ABNORMAL LOSS IN CONSIGNEE’S GODOWN
| PARTICULARS | AMOUNT |
| Cost price of goods lost in consignee’s godown | |
| ADD: Consignor’s proportionate expenses (Consignor’s total expenses/ total units sent)* Units lost. | |
| ADD: Consignee’s proportionate non-recurring expenses (Consignor’s total non-recurring expenses/ Total units received by consignee)*Units lost | |
| Cost of Abnormal loss in consignee’s godown (A+B+C) |
EXAMPLE:
ABC Ltd. Dispatched 1000 transistors at ₹70 each to PQR Ltd. The consignors paid freight 750, cartage ₹50 and insurance ₹250. ABC Ltd. Received only 900 sets and incurred the following expenses:
Octroi and other expenses: ₹10,000
Cartage: 500
Sales expenses: 600
The consignee sold 600n sets only. The valuation of stock in this case of abnormal loss will be made as follows:
Number of sets lying in the stock= 1000- (100+600)= 300
| Cost of 300 sets @₹70 per set | ₹21,000 |
| Add: Proportionate expenses incurred by the consignor i.e. {(300/1000)*1050} | ₹315 |
| Add: proportionate expenses (direct) incurred by the consignee i.e. {(300/900)*10,500} | ₹3,500 |
| Value of Stock | ₹24, 815 |
So, above is the treatment of normal loss and abnormal loss.
To conclude, normal loss can be recovered by inflating the selling price of the goods but abnormal loss has to be charged in Profit and loss account and cannot be recovered by inflating the selling price of the goods.