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DIFFERENCE BETWEEN NORMAL AND ABNORMAL LOSS

DIFFERENCE BETWEEN NORMAL AND ABNORMAL LOSS

Posted on September 28, 2019 By commerceiets No Comments on DIFFERENCE BETWEEN NORMAL AND ABNORMAL LOSS

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  • The Difference between Normal and Abnormal loss is as follows:
      • NORMAL LOSS
      • ABNORMAL LOSS
        • DIFFERENCE BETWEEN NORMAL AND ABNORMAL LOSS

The Difference between Normal and Abnormal loss is as follows:

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

ABNORMAL LOSS

Abnormal Losses 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.

DIFFERENCE BETWEEN NORMAL AND ABNORMAL LOSS

BASIS OF DIFFERENCE NORMAL LOSS ABNORMAL LOSSES
AVOIDABLE Normal loss cannot be avoided. Abnormal Loss is avoidable o account of precautions.
CAUSES This loss is due to nature of the goods such as evaporation, loss of weight, drying etc. This loss arises due to external reasons like loss by theft, fire, carelessness etc.
CALCULATIONS This loss is not calculated separately. Value of abnormal loss is calculated in the same manner as the value of stock on consignment.
INSURANCE Normal loss cannot be insured. Abnormal loss can be insured.
JOURNAL ENTRIES No separate journal entries are posted to show the normal loss. Proper journal entries are required to be made to treat the abnormal loss in consignor’s books.
ADJUSTMENTS The value of remaining goods/ units is inflated by the cost of such loss as under: Value of closing stock= {Total Cost/ (Total quantity- normal loss quantity)}* unsold stock The value of abnormal loss is credited to consignment account in order to calculate the normal profit or loss on consignment.
TREATMENT IN ACCOUNTS Cost of normal loss is borne by remaining goods. Cost of abnormal losses is not borne by remaining goods.
PART OF COST It is treated as a part of cost. It is charged to profit and loss account not being treated as a part of cost.
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