Normal and Abnormal Loss in Consignment Accounts

Understand Normal and Abnormal Loss in Consignment

Key rules to remember

Cost per unit with normal loss

Cost per unit = Total cost of goods and expenses ÷ (Units consigned − Units of normal loss)

Use this when the loss is normal. Closing stock is valued on this higher unit cost.

Value of abnormal loss

Abnormal loss = Total cost up to the loss point × Abnormal units ÷ (Units sent − Normal loss units occurring before that point)

The divisor includes the abnormal units themselves. Deduct only normal loss that occurred before the point of abnormal loss.

Entry for abnormal loss

Abnormal Loss A/c Dr; To Consignment A/c

This reduces the consignment cost and shows the loss separately.

Entry for insurance claim

Insurance Company A/c (or Claim Receivable) Dr; To Abnormal Loss A/c

Pass this for the amount the insurer admits.

Write-off of net loss

Profit and Loss A/c Dr; To Abnormal Loss A/c

Transfer the balance not recovered from the insurer.

Closing stock

Closing stock = Cost per unit × Units unsold, plus later expenses on those units

Unsold units at the consignee's end bear the proportion of later expenses such as godown rent.

How to solve Normal and Abnormal Loss in Consignment questions

1. 1Read the question and mark each loss as normal or abnormal. Words like theft, fire, accident, negligence mean abnormal; leakage, evaporation, breakage in handling mean normal.
2. 2Make a unit table: units sent, normal loss, abnormal loss, units sold, units in stock.
3. 3Find the cost of goods sent, using invoice price or cost price as the question says, plus all expenses.
4. 4Split the expenses into those incurred up to the point of loss (shared by lost units and good units) and those after the loss (shared by good units only).
5. 5Calculate the abnormal loss as total cost up to the loss point × abnormal units ÷ units available at that point. Units available are units sent less any normal loss that occurred before that point. The divisor includes the abnormal units.
6. 6Post Abnormal Loss A/c Dr, Consignment A/c Cr. Show the insurance claim and the balance written off to Profit and Loss A/c.
7. 7Value closing stock on the cost per unit after absorbing normal loss, then add the proportionate later expenses.
8. 8Finish the Consignment Account, find the profit or loss, and transfer it to the consignor's Profit and Loss A/c.

Quickest way: Unit-ratio shortcut for loss amounts

Common mistakes in Normal and Abnormal Loss in Consignment

• Passing a separate entry for normal loss.

  Students think every loss needs a debit to a loss account.

  Fix: Do not pass an entry. Reduce the units and recompute cost per unit on the good units.

• Dividing by the wrong number of units when valuing abnormal loss.

  Students divide by total units sent even when a normal loss happened before the abnormal loss, or they leave the abnormal units out of the divisor.

  Fix: Divide by the units available at the loss point: units sent less normal loss before that point. The divisor includes the abnormal units themselves.

• Adding consignee's later expenses to the abnormal loss.

  Students spread all expenses over all units.

  Fix: Expenses after the loss point are borne only by the units that reach the consignee. Leave them out of the loss.

• Writing the full abnormal loss to Profit and Loss when an insurance claim exists.

  Students forget the claim or its amount.

  Fix: Credit Abnormal Loss A/c with the claim admitted and transfer only the balance to Profit and Loss A/c.

• Valuing abnormal loss at selling price.

  Students confuse loss of goods with loss of profit.

  Fix: Always value it at cost: proportionate invoice price and expenses. Selling price is not used.

• Treating loss in the godown after sales as normal without reading the cause.

  Students rely on the place of loss instead of its nature.

  Fix: Decide by the cause. Leakage is normal wherever it occurs; theft or fire is abnormal.

Worked examples