Under Consignment arrangement, when goods are transferred from one place to another, there is a possibility of loss in transit. The loss can also take place in the godown of the Consignee. The loss may occur due to factors like evaporation, leakage, mishandling etc., or due to some accident or theft. Such losses can be broadly divided into two types :
a) Normal Loss
b) Abnormal Loss.
Let us discuss the exact nature of these losses and their accounting treatment.
Normal Loss
It is a loss which is due to the inherent nature of the goods consigned. It may arise in the process of loading and unloading of goods, breaking of bulk pieces into smaller ones, weighing, due to evaporation, processing, etc. For example, while loading or unloading or weighing coal, some part is bound to fall down in powdered form. Similarly, the petroleum products are bound to loose weight due to evaporation or leakage. This type of loss is unavoidable. It can be reduced to some extent but cannot be eliminated altogether. Since this loss occurs in the ordinary course of business and is on account of inherent characteristics of the goods, it is called a normal loss. Normal loss is not shown separately in the books of accounts. The cost of normal loss is spread over the remaining units, thereby increasing the cost per unit of the goods.
For example 10,000 tons of coal is sent on consignment costing Rs. 100 each. The normal wastage is i.e., 200 tons. Let us see how normal loss leads to an inflated cost price per unit.
Total Cost of 10,000 = Rs. 10,00,000 (10,000 100)
Total units = 10,000 tons
Normal Loss = 200 tons
Remaining units = 9,800 tons
Rs. 10,00,000 will now be the cost of 9,800 tons as the cost of normal loss is borne by the remaining units. The cost per unit will therefore be 10,00,000/9,800= Rs. 102.04 approximately.
As stated earlier, no separate entry is passed for the normal loss. The effect of this is reflected in the valuation of closing stock only.
If the consignee is able to sell all the goods so that there is no stock left unsold, the question of normal loss becomes irrelevant. The problem arises only when some goods are left unsold with the consignee. In that case, we shall first calculate the inflated cost per unit as explained above, and then the closing stock shall be valued by multiplying the number of units in stock with the inflated cost per unit.
The value of closing stock can also be computed directly (without calculating the inflated cost per unit) with the help of the following formula.
Unsold Units
Total Cost of Goods Consigned = Unsold Units / Remaining Units
Abnormal Loss
The loss which occurs due to negligence, inefficiency or some accident is treated as abnormal loss. For example, loss of goods due to fire, floods, earth quakes, riots, war, theft etc. Such a loss does not occur on account of inherent nature of the product, but on account of the operation of certain external forces. Abnormal loss is calculated in the same manner as the value of closing stock. In other words, in order to calculate the 33 abnormal loss, all the proportionate non-recurring expenses incurred up to the point of loss are also added to the cost of abnormal loss units. The formula for calculation of abnormal loss is as follows:
Cost of Abnormal Loss Units = No. of Abnormal Loss Units X Cost Per Unit + Non-recurring Expenses upto the Point of Loss X No. of Abnormal Loss Units/No. of Units Consigned
Since the abnormal loss is not incidental to the consignment, it should be shown separately in the books of accounts. The total abnormal loss is credited to the Consignment Account. The following entry is passed in the books of the Consignor:
Abnormal Loss A/c Dr.
To Consignment A/c
(Being loss on account of ...)
Such an abnormal loss may be
i) Uninsured
ii) Partially Insured
iii) Fully Insured
i) When the abnormal loss is Uninsured: In case the abnormal loss is not insured with an insurance company, the total amount of the loss is transferred to Profit & Loss Account by passing the following entry.
Profit & Loss A/c Dr.
To Abnormal Loss A/c
(Being Abnormal Loss transferred to P&L A/c)
ii) When the abnormal loss is partially insurred : In case the abnormal loss is insurred and the claim is admitted for a part of the loss, then the following entry is passed
Insurance Company’s A/c Dr.
Profit & Loss A/c Dr.
To Abnormal Loss A/c
(Being partial claim admitted)
Insurance Company will be debited with the amount of claim admitted and only the balance amount (total loss minus the claim) is transferred to Profit & Loss Account.
iii) When the abnormal loss is fully insured: In case the loss is fully insured and the total ‘claim’ is admitted by the insurance company, the following entry will be passed.
Insurance Company’s A/c Dr.
To Abnormal Loss A/c
(Being claim fully admitted)
Nothing is transferred to the Profit & Loss Account as the claim for the whole amount of loss had been admitted by the insurance company. No loss is to be borne by the Consignor.
Effect of abnormal loss on valuation of closing stock
The value of closing stock is also effected in case of abnormal loss. Abnormal loss may occur either in the godown of the Consignee or in transit. Let us see the effect of abnormal loss on the closing stock under both situations. When the abnormal loss occurs in the godown of the Consignee, the valuation of closing stock is not effected because the expenses incurred after reaching the godown of the Consignee are not to be taken into account for the purpose. Hence, the normal formula will be followed for the valuation of closing stock.
