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TREATMENT OF LOSS ON CONSIGNMENT

Posted on September 28, 2019 By commerceiets No Comments on TREATMENT OF LOSS ON CONSIGNMENT

Table of Contents

  • TREATMENT OF LOSS ON CONSIGNMENT
    • ACCOUNTING FOR NORMAL LOSS
    • ACCOUNTING FOR ABNORMAL LOSS

TREATMENT OF LOSS ON CONSIGNMENT

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
Treatment of loss on consignment

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)  

STOCK VALUATION IN CASE OF LOSS

Value of the remaining stock is composed of the following:

  1. Proportion of the cost of goods.
  2. Expenses incurred on goods before the occurrence of loss.
  3. Expenses incurred on goods after the loss has occurred.

(Closing Stock/ Total Cost)*(Cost of goods+ expenses before loss)

EXAMPLE: X consigned 100 cycles costing Rs. 150 each to his agent Y. Expenses incurred in sending them were Rs. 1,000. On the way 5 cycles were damaged. Y took the delivery of the rest and  incurred direct expenses of Rs. 285 and indirect expenses of Rs. 150. Calculate the amount of abnormal loss.

Cost Price of 5 damaged cycles @ Rs. 150 each 750
ADD: Proportionate expenses of X (1,000/100)*5 50
  800
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AccountingNon profit organisationDepreciationLiquidity ratios
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Benefits of AccountingScope of accountingHire Purchase AccountingCash Ratio
Difference between cost accounting and financial accountingFinancial accounting, cost accounting and management accountingDifference between hire purchase and instalment systemFinancial ratio analysis
Difference between transaction and eventTransactionsUsers of AccountingRatio analysis
Limitation of AccountingCapital ExpenditureInstalment SystemDifference between consignment and sale
Book KeepingRevenue ExpenditureReserves AccountingAbnormal loss vs normal loss in consignment
AccountancyDifference between capital and revenue expenditureProvisions Treatment of loss on consignment
Accounting as science or an artAccounting EquationSingle entry systemAccounting treatment of consignment
Book Keeping vs accountingDeferred Revenue ExpenditureDifference between statement of affairs and balance sheetJoint venture vs consignment
Book keeping vs accountancyCapital receiptIFRSDepartmental Accounting
Accounting vs accountancyRevenue receiptBalance SheetMethods of departmental accounting
Basis of AccountingDifference between capital and revenue receiptProfit and loss AccountAllocation of expenses in departmental accounting
Branches of accountingDifference between accounting concepts and conventionsTrading AccountInter-departmental transfers
Cash and mercantile system of accountingAccounting StandardsVoyage AccountDifferent types of branches
Accounting PrinciplesObjectives of AccountingAccounting for Incomplete VoyageDepartmental vs Branch accounting
Golden ru les of accountingProcess of AccountingJoint ventureMethods of branch accounting
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Double entry vs Single entry systemAccounting Concepts vs Accounting conventionsMethods of recording transactions in Joint VentureGarner VS Murray Rule
History of AccountingDifference between provisions and reservesConsignment
CONNECT ON LINKEDIN
FINANCIAL ACCOUNTING Tags:CONSIGNMENT

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