List out 10 types of abnormal loss and abnormal gain while calculating goodwill of the company. in point
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Normal and Abnormal Loss
In accounting, Consignment can be defined as the act of sending the goods by the manufacturers or producers to their agents for the purpose of sale. The person who sends the goods is Consignor (the manufacturer or producer) and the agent who receives the goods is Consignee. During the consignment, normal and abnormal loss may occur. We will discuss it here.
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Normal and Abnormal Loss
Goods sent on consignment does not become the property of consignee as he has not bought them. The ownership of goods remains with the consignor until they are sold, so the goods appear as inventory in the books of the consignor, not the consignee.
The consignee tries to sell the goods according to the instructions of the consignor. When the goods are sold he will deduct his expenses, commission,etc., from the sale proceeds and remits the balance to the consignor. If the goods are destroyed, consignee will not be responsible. Its burden will fall on the consignor. There are two types of losses that can occur in consignment :
1] Normal Loss
The normal loss means a loss which is inherited and can not be avoided. It should also be considered while valuing the closing stock.
To ascertain the cost per unit after the normal loss, we use the following formula:
Cost per unit
=
Total cost
+
Expenses incurred
Total quantity
–
Normal loss
For example: If a certain amount of oranges are consigned, some of them will be destroyed in loading and unloading whereas some of them will not be in a state to be sold. Suppose, 10,000 oranges were sent to the consignee at ₹30 per kg and freight of ₹60,000. It is known that there would be a normal loss of 10%.
Cost per kg
=
300000
+
60000
9000
i.e.
10000
−
10
=
₹
40
If the unsold quantity is 500 its value will be
(
500
×
40
=
20000
)
.
Note: No entry is recorded for normal loss in the books.
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Browse more Topics under Consignments
Meaning And Distinctions
Accounting Entries in books of Consignor
Accounting Entries in books of Consignee
2] Abnormal Loss
Some losses are accidental or can be caused by carelessness. Example: by theft or loss by fire, flood, earthquake, war, accidents in transit, etc. Such losses are more or less abnormal. Suppose a part of goods is stolen, now this will reduce the value of stock and therefore profit on consignment. Now the best thing is to find out the cost of goods that are lost. After finding out the value, consignment a/c is credited and abnormal a/c is debited and then transferred to profit and loss a/c, so as to arrive at correct profit or loss of consignment.
Some businessmen also take an insurance policy in respect of goods sent or received. Such a policy is obtained only in respect of abnormal loss caused to goods.
Abnormal loss
Source: Dreamstime.com
Journal Entries
1. When the loss is irrecoverable:
Date Particulars Amount (Dr) Amount (Cr)
1. Abnormal loss a/c Dr. xxx
To Consignment a/c xxx
(Being value of abnormal loss)
2 Profit and Loss A/c Dr xxx
To Abnormal loss xxx
(Being loss transferred)
2. When the loss is insured and is recoverable:
(a) When full amount is recoverable
Date Particulars Amount (Dr) Amount (Cr)
1. Abnormal loss a/c Dr. xxx
To Consignment a/c xxx
(Being abnormal loss valued)
2. Insurance company a/c Dr. xxx
To Abnormal loss a/c xxx
(Being abnormal loss transferred to insurance co.)
(b) When the loss is partly recoverable
Date Particulars Amount (Dr) Amount (Cr)
1. Abnormal loss a/c Dr. xxx
To Consignment a/c xxx
(Being abnormal loss valued)
2. Insurance company a/c D agent Mr. B on a commission of 5% on gross sales.
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