CONSIGNMENT ACCOUNTS
Introduction
To start a business we require
two kinds of investments i.e., fixed capital investments and working capital
investments. Fixed capital investments are required to purchase the fixed
assets or infrastructure like land, buildings, machinery, furniture etc. and
working capital investments are required to run the day to day activities of
the concern to manage the production and selling activities. Similarly, when
the proprietor is going for diversification of business, we require again the
same funds.
Wholesalers
and manufacturers find it quite convenient and profitable to sell goods through
the medium of agents. The agents sell the goods on behalf of businessmen and
charges commission. The manufacturers and wholesalers will choose consignment
business to escape from huge investments out of the business transactions.
Meaning
To ‘consign’ means ‘to send’. In
accounting, consignment refers to a situation where a person (called consignor)
send the goods to another person (called consignee), for the purpose of selling
the goods on behalf of, and at the risk of consignor.
There are two
parties involved in consignment.
A.
Consignor: The person sending goods
B.
Consignee: The person to whom the goods are sent.
The following are the key features of consignment:
1.
The relationship
between the consignor and consignee is called Principal and Agent but not buyer
and seller.
2.
The ownership of
the goods i.e., the property in the goods, remains with consignor or the
principal. The agent does not become the owner of the goods even though they
are in his possession.
3.
The principal
does not send the invoice to his agent. He sends only a proforma invoice, a
statement that looks like an invoice but is really not one. The object of the
proforma invoice is only to convey information to the agent regarding the
particulars of the goods sent.
4.
Generally, the
agent recovers all the cash for the expenses met in consignment business on his
behalf. However such expenses can be shared with mutual agreement between them.
5.
The consignee
gives an advance to the consignor in the form of cash or bill of exchange. This
advance will be adjusted against the sale proceeds of the goods.
6.
The consignee is
entitled to a commission, which is calculated on the basis of gross sales made
by him.
7.
Firms usually
like to ascertain the profits or loss on each consignment or consignments to
each agent.
8.
Important Terms:
1.
Proforma
Invoice: In consignment business, the
goods are sent on consignment to agent for resale. Since it cannot be treated
as sales, Instead of sending invoice, Proforma Invoice (statement) is prepared
by consignor to inform the quantity, quality and price of goods, expenses by
consignor, price of goods to be sold, loading if any on cost price etc. to
consignee. The price mentioned in the Proforma invoice is known as ‘Proforma
Invoice Price’.
2.
Account Sales: The consignee sends a periodic statement of account
to the consignor. This statement is called Account sales. The statement
contains the details of:
A.
Sale made by the
consignee.
B.
Expenses incurred
on behalf of consignor
C.
Commission earned
by the consignee
D.
Advance payment
or security deposited with consignor and the extent which it has been adjusted.
E.
Unsold stock, if
any, left with consignee and
F.
Net balance due
to / due from the consignee.
3.
Commission: Commission is a remuneration paid by the consignor to
the consignee for the services rendered him in consignment business. There are
three types of commission can be provided by the consignor to the consignee.
The commission allowed by consignor will depends up on the agreement, either
simultaneously or in isolation. They are:
A.
Ordinary Commission: The commission simply denotes the ordinary
commission. It is based on fixed percentage of the gross sales made by the
consignee. It is given by the consignor with regardless of whether the
consignee is making credit sales or not. This type of commission does not give
any protection to the consignor from bad debts to consignor.
B.
Del – Credere Commission: To increase the sales and to encourage the consignee
to make credit sales, the consignor provides the additional commission generally
known as del – Credere commission. After providing the del – Credere
commission, bad debts is no more a loss to the consignor. Bad debts are borne
by consignee after paying del – Credere commission. Del – Credere commission is
calculated on total sales unless there is any agreement between the consignor
and consignee to provide it on credit sales only.
C.
Over – Riding Commission: It is an extra commission allowed by consignor to
promote sales at higher price than specified or to encourage consignee to put
hard work in introducing new product in the market. Depending on the agreement
it is calculated on total sales or on difference between actual sales and sales
at invoice price or any specified price.
4.
Discount on
bills receivable: There are two
alternative treatments for this item:
A.
If discount is
treated as ‘consignment expense’, it is debited to consignment account.
B.
If discount is
treated as ‘financial charge’, it is debited to profit and loss account.
5.
Valuation of
closing stock with consignee: Closing
stock with consignee is value at cost or net realizable value whichever is
lower. To ascertain the cost, we calculate by taking
|
Value
of goods sent by consignor + Proportionate
Non – Recurring expenses by Consignor +
Proportionate Non – Recurring expenses by consignee
|
proportionate non – recurring expenses which have been
incurred up to the time like
like freight, cartage, transit insurance, octroi,
import duty, customs duty, packing charges, loading charges, dock dues etc.
will be included for stock valuation. Expenses like godown rent, godown
insurance, sales expenses are not included in stock valuation. Market value is
the net realizable value i.e., sales commission and other variable sales
expenses are deducted from the market value on the closing stock.
Other points:
A.
When the goods
are invoiced above the cost, closing stock should be valued including loading,
i.e., profit element. Thereafter, loading must be reversed by creating stock
reserve.
B.
Indirect expenses
incurred by the consignor like discount on bills receivable which are not
related to sending of goods should not be considered while considering stock
valuation.
C.
Expenses incurred
after the goods have reached the consignee’s godown should not be taken into
account for valuation of stock.
D.
If question is
given by all expenses of consignor and consignee at bulk separately, only
consignor expenses are considered.
6.
Goods invoiced
at a price above cost: If consignor
sends Proforma invoice to consignee at a price above cost, profit is calculated
on the basis of cost. Therefore, adjustment shall be made for excess of invoice
price over cost included in the value of ‘goods sent on consignment’.
7.
Normal loss: If some loss is essential and unavoidable, it would be
spread the entire consignment while valuing stock. The total cost plus expenses
incurred should be divided by quantity available after normal loss to ascertain
the cost per unit.
Suppose 1,000 kg of apples
are consigned to a wholesaler, the cost being Rs.3/- per kg, plus Rs.400/- of
freight. It is concluded that a loss of 15% is unavoidable. The cost per kg
will be Rs.3400/850 or Rs.4/-. If the stock is 100 kgs, its value will be
Rs.400/-
8.
Abnormal Loss: Any accidental or unnecessary loss occurs, the proper
thing to do is to find out the cost of the goods thus lost and then credit the
consignment account and debit the profit and loss account. This will enable the
consignor to know what profit would have been earned had the loss not taken
place.
Suppose 1,000 sewing
machines costing Rs.250/- each are sent on consignment basis and Rs.10,000/-
are spent on freight etc. 20 machines are damaged beyond repair. The amount of
loss will be
Cost = 20 × 2520 Rs.5,000
Expenses
= 2×10,000/1000 Rs.200
------------
Rs.5,200
------------
This amount should be credit
to the consignment account and debited to profit and loss account. If any
amount, say, Rs.4,000/- is received from the insurers, then debit to the profit
and loss account will be Rs.1,200/-. But credit to the consignment account will
still be Rs.5,200/-. Rs.4,000/- will have been debit to the bank account.
Note: The abnormal loss is valued just like stock in hand.
Students have to be very careful while valuing goods lost in transit and goods
lost in consignee’s godown. Both are abnormal loss but in case of former,
consignee’s non – recurring expenses are not to be included where as it is to
be included in case of later.
Differences between Consignment and Sale
|
Basis
|
Consignment
|
Sale
|
|
1.
Parties
|
Consignor and
Consignee.
|
Seller and Buyer
|
|
2.
Ownership of
goods
|
Ownership remains
with the consignor till goods are sold. There is no transfer of ownership to
the consignee.
|
Ownership of goods
will be transferred to the buyer immediately upon sale
|
|
3.
Risk
|
Risk of loss or
damage of goods lies with the consignor only.
|
Risk of loss or
damage of goods lies with the buyer once the goods are sold
|
|
4.
Return of goods
|
Consignee can
return the unsold goods to consignee
|
Generally, buyer
cannot return goods once it is sold to him.
|
|
5.
Relationship
between parties
|
Principal – Agent
relationship.
Consignor –
Principal
Consignee – Agent.
|
Creditor – Debtor
relationship.
Seller – Creditor
(in Buyer’s Books)
Buyer – Debtor (in
Seller’s Books
|
|
6.
Expenses
|
Expenses are borne
by consignor
|
After sales, the
expenses are borne by buyer.
|
|
7.
Invoice
|
A Proforma Invoice
is prepared by consignor when goods are sent.
|
Original sales
invoice is prepared by seller when sale is made
|
|
8.
Remuneration
|
Consignee receives
commission on sale of goods
|
Buyer does not
receive any commission.
|
ACCOUNTNG ENTRIES
|
IN THE BOOKS OF CONSIGNOR
|
ENTRIES IN THE BOOKS OF CONSIGNEE
|
|
Consignor maintains separate books of
accounts for goods sent on each consignment.
1. On dispatch
of goods to consignee
-
Consignment A/c
Dr XXX
To
Goods sent on Consignment A/c XXX
(Being goods sent to agent for
sale) Note: If the consignor has more than one agent, separate
consignment account is prepared for each agent. Each consignment is
identified with the name of place, for example ‘consignment to Agra a/c’. if
goods have been sent to agent at price above the cost, adjustment shall be
made with the difference between cost and invoice price of the goods.
2.
For adjustment of goods sent on consignment
-
Goods sent on
consignment A/c Dr
To
Consignment A/c
(Being excess of invoice price
over cost price of goods sent adjusted)
3. For
expenses incurred by consignor
-
Consignment A/c
Dr
To
Cash/bank A/c
(Being expenses paid)
4. On receipt
of advance from consignee
-
Cash/ bank A/c Dr
To
Consignee A/c
(Being advance received from
agent)
5. If
consignee accepted a bill of exchange
-
Bills
receivable A/c Dr
To
Consignee A/c
(Being acceptance received
from agent)
6. With the
sale price of goods sold by consignee
-
Consignee a/c Dr
To
Consignment a/c
(Being goods sold by agent)
7. For goods
taken over by consignee
-
Consignee a/c Dr
To
Consignment a/c
(Being goods taken over by
agent)
8. For
expenses incurred by agent
-
Consignment a/c
Dr
To
Consignee a/c
(Being expenses incurred by agent)
Note: If
any of the expense is borne by agent personally, such expenses will not be
debited in consignment a/c consignor will not make any entry for such
expenses. These will be debited to the Profit and Loss account in the books
of consignor.
9. For closing
stock held by consignee
-
Consignment
stock a/c Dr
To
Consignment a/c
(Being the value of Closing stock with agent)
Note: If
invoice value of stock is more than cost, the excess of invoice price over
cost will be adjusted.
10. For adjustment of closing stock
-
Consignment a/c Dr
To
Consignment stock reserve a/c
11.
For abnormal loss of goods:
Method 1:
a.
For total value of goods damaged
-
Loss of stock
a/c Dr
To
Consignment a/c
(Being total value of loss of
stock)
b.
For amount of insurance claim
-
Bank/Insurance
Co a/c Dr
To Loss
of stock a/c
(Being insurance claim for
loss)
c.
For sale proceeds of damaged goods
-
Consignee a/c Dr
To loss
of stock a/c
(being damaged goods sold by
agent)
d.
For net loss of
stock
-
Profit and Loss
a/c Dr
To Loss
of stock a/c
(Being net loss of stock transferred
to P&L a/c)
Method 2:
a.
For amount of insurance claim
-
Bank/Insurance
Co a/c Dr
To
consignment a/c
(Being amount of insurance
claim)
b. For sale of
proceeds of damaged goods
-
Consignee a/c Dr
To
Consignment a/c
(Being damaged goods sold by
agent)
c. For net
loss of stock
-
Profit and Loss
a/c Dr
To
Consignment a/c
(Being amount of
net loss transferred to P&L a/c)
Note: If
damaged goods have not been sold, net realizable value of such goods will be
included in closing consignment stock.
12.
For profit on consignment
-
Consignment a/c
Dr
To
Profit and Loss a/c
(Being net profit on
consignment)
Note: In
case of loss (debit balance of consignment a/c exceeds credit balance)
reverse entry will be made)
|
1. On payment
of advance to consignor
-
Consignor a/c
Dr
To
Cash/bank a/c
(Being advance paid to
consignor)
2. On
acceptance of bill of exchange in favor consignee
-
Consignor a/c Dr
To
Bills payable a/c
(Being acceptance given to
consignor)
3. On payment
of expense for consignor
-
Consignor a/c Dr
To Cash
a/c
(Being expenses paid on behalf
of consignor)
4. On payment
of expenses to be borne by consignee
-
Expenses a/c Dr
To Cash
a/c
(Being expenses paid)
Note: These
expenses will be transferred to Profit and Loss a/c of consignee
5. On sale of
goods for cash
-
Cash a/c Dr
To
Consignor a/c
(Being goods sold for cash on
behalf of consignor)
6. On sale of
goods for credit
-
Sundry debtors
a/c Dr
To
Consignor a/c
(Being
goods sold on credit on behalf of consignment sale)
7. For
commission of consignee
-
Consignor a/c Dr
To Commission a/c
(Being
commission earned on consignment sale)
Note: There may be a separate account
regarding Del – Credere commission.
8. For taken
over by consignee
-
Purchases a/c Dr
To Consignor a/c
(Being
goods taken over out of consignment stock)
9. When there
is realization from debtors
-
Cash/Bank a/c Dr
To Sundry Debtor a/c
(Being
amount realized from debtor)
10. If there is
bad debt on above realization and consignee does not receive Del credere
commission but if he receives Del Credere commission
-
Consignor a/c Dr
To Sundry Debtors a/c
(Being
bad debts charged from commission earned)
11. For final
payment to consignor:
a.
Payment in cash/bank draft
-
Consignor a/c Dr
To Cash/bank a/c
(Being
final payment made to consignor)
b.
Payment by accepting a bill
-
Consignor a/c Dr
To Bills Payable a/c
(Being
acceptance given to consignor in final settlement)
12. Balance in the commission account will be
transferred to Profit and Loss account.
|
PRACTICAL PROBLEMS
Ø When the
goods are invoiced at Cost: 1
1.
A sends the 500
cases to B on consignment basis. Each case cost Rs.100/-. Consignor spends Rs.300/-
in dispatching the goods. The consignee is entitled to receive a commission of
6% on sales plus expenses incurred by him. He advances immediately Rs.10,000 to
the consignor. Later, B send account sales which disclosed the following
details:
-
300 cases sold @
Rs.200/- each
-
200 cases sold @
Rs.220/- each
-
Railway freight
and carriage Rs.12,500/-
-
Godown rent and
insurance Rs.2,500/-
B remits a bank draft for the balance amount.
Show ledger accounts in the books of consignor and
consignee.
Solution :
Ledger accounts in the books of
consignor:
There will be three accounts in the
books of consignor i.e., Consignment account, Consignee account and Goods sent
on consignment account.
Consignment account
|
Partiulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Goods sent on consignment a/c
(500
cases @ Rs.100/- per case)
To Cash (Despatching Exp)
To B (Consignee)
Freight and Carriage – 12,500
Godown Rent and Ins – 2,500
To B (Consignee)
(Commission @ 6% on 1,04,000)
To Profit and Loss a/c
|
50,000
300
15,000
6,240
32,460
|
By B a/c (sales)
300 cases @ Rs.200 = 60,000
200 cases @ Rs.220 = 44,000
|
1,04,000
|
|
1,04,000
|
1,04,000
|
B’s Account (Consignee)
|
Particulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Consignment a/c
|
1,04,000
|
By Cash a/c (Advance)
By Consignment a/c ( Expenses)
By Consignment a/c (Commission @ 6% on
sales)
By Bank a/c (Balance)
|
10,000
15,000
6,240
72,760
|
|
1,04,000
|
1,04,000
|
Goods sent on Consignment a/c
|
Particulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Trading a/c
|
50,000
|
By Consignment a/c
|
50,000
|
|
50,000
|
50,000
|
Ledger accounts in the books of
Consignee:
The consignee maintains only one account
in his books regarding the consignment i.e., Consignor a/c
A’s a/c (Consignor)
|
Particulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Cash a/c (Advance)
To Cash ( Expenses)
To Commission a/c (6% on sales )
To Bank a/c (Balance)
|
10,000
15,000
6,240
72,760
|
By Cash a/c (Sales)
|
1,04,000
|
|
1,04,000
|
1,04,000
|
Ø When the
goods are invoiced at cost: 2
X sent goods to Y goods costing
Rs.50,000/- on 1ST July, 2006 and spent Rs.1,000/- for expenses. On
3rd July, Y received the goods and sent his acceptance to X for
Rs.30,000/- payable after 3 months. Y spent Rs.2,000/- on freight and cartage,
Godown rent Rs.500/-, Insurance for Rs.300/-. On 31st december he
sent his account sales (along with the amount due to X)showing that 4/5 of the
goods had been sold for Rs.55,000/-. Y is entitled to a commission of 10%. One
of the customers turned insolvent and could not pay Rs.600/- from him. Show
necessary accounts.
Solution :
Ledger accounts in the books of
consignor:
There will be three accounts in the
books of consignor i.e., Consignment account, Consignee account and Goods sent
on consignment account.
Consignment account
|
Partiulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Goods sent on consignment a/c
To Cash (Despatching Exp)
To B expenses and bad debts
(Consignee)
To B (Commission)
To Profit and Loss a/c
|
50,000
1,000
3,400
5,500
5,700
|
By B a/c (sales)
By Stock on Consignment a/c
|
55,000
10,600
|
|
65,000
|
65,000
|
B’s Account (Consignee)
|
Particulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Consignment a/c
|
55,000
|
By Bills Receivable a/c (Advance)
By Consignment a/c ( Expenses and bad
debts)
By Consignment a/c (Commission on
sales)
By Bank a/c (Balance received)
|
30,000
3,400
5,500
16,100
|
|
55,000
|
55,000
|
Goods sent on Consignment a/c
|
Particulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Trading a/c
|
50,000
|
By Consignment a/c
|
50,000
|
|
50,000
|
50,000
|
Ledger accounts in the books of
Consignee:
The consignee maintains only one account
in his books regarding the consignment i.e., Consignor a/c
A’s a/c (Consignor)
|
Particulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Bills Payable a/c (Advance)
To Cash and bad debts ( Expenses)
To Commission a/c (on sales )
To Bank a/c (Balance)
|
30,000
3,400
5,500
16,100
|
By Cash a/c (Sales)
|
55,000
|
|
55,000
|
55,000
|
STOCK
VALUATION
The principle is that the stock
should be valued at cost or net
realizable value whichever is lower. The same principle is practiced for
preparing final accounts. In case of consignment, cost means not only the cost
of goods as such to the consignor but also all expenses incurred till the goods
reach the premises of the consignee. Such expenses include freight, cartage,
transit insurance, octroi, import duty, customs duty, packing charges; loading
charges, dock dues etc. will be included for stock valuation.
Sometimes he states that
consignor has spent some amount and consignee spent so much i.e., total amount
will be given without giving the details of amounts spent by consignee and
consignor. In this situation, for valuing stock, expenses incurred by consignor
are taken as part and those incurred by consignee are ignored.
If the expected selling price of
stock on hand is lower than the cost, the value put on the stock should be
expected net selling price only i.e., expected selling price less delivery
expenses.
INVOICING GOODS ABOVE THE COST
In some cases, Proforma invoice
prepared by consignor (cost of goods sent by consignor) may include with extra
cost and entries in the books of consignor are recorded by consignor in the
same pattern. So the unsold stock with the consignor initially be valued at
invoice price + and then proceeded. It must be remembered that, the profit and
loss can be determined accurately only when sale proceeds + stock in hand is
valued at cost basis and when it is compared with the goods sold together.
Hence if the entries are first
made on invoice basis, the effect of loading (i.e., amount added to arrive at
the invoice price) should be removed again by passing additional entries.
v If the invoice price of goods is cost + 20%, i.e.,
60,000 for the goods sent to consignee. The initial entries will be same as we
discussed earlier upto normal problem. Additional entries will be recorded in
following manner.
1.
When goods are
dispatched by consignor.
-
Goods sent on
consignment a/c Dr
To
Consignment a/c
(First entry will be reversed to the extent of loading
in order to debit the consignment a/c on cost basis)
2.
When loading is
removed from stock lying in consignee godown
-
Consignment a/c Dr
To Stock Reserve a/c
(The amount of loading included in the value of
closing stock is unrealized profit – hence reverse entry created by debit to
the consignment a/c)
The consignment account now reveal a profit of Rs.5,700/- the same as before. It will be transferred to
the P&L a/c. The Y’s account will be same as discussed above.
Ø When the
goods are invoiced above cost: 3
X
sent goods to Y Rs.60,000/- at cost plus
20% on 1ST July, 2006 and spent Rs.1,000/- for expenses. On 3rd
July, Y received the goods and sent his acceptance to X for Rs.30,000/- payable
after 3 months. Y spent Rs.2,000/- on freight and cartage, Godown rent Rs.500/-,
Insurance for Rs.300/-. On 31st december he sent his account sales
(along with the amount due to X) showing that 4/5 of the goods had been sold
for Rs.55,000/-. Y is entitled to a commission of 10%. One of the customers
turned insolvent and could not pay Rs.600/- from him. Show necessary accounts.
Solution
:
Ledger accounts in the books of
consignor:
There will be three accounts in the
books of consignor i.e., Consignment account, Consignee account and Goods sent
on consignment account.
Consignment account
|
Partiulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Goods sent on consignment a/c
To Cash (Despatching Exp.)
To B expenses and bad debts
(Consignee)
To Y (Commission)
To Stock Reserve a/c
To Profit and Loss a/c
|
50,000
1,000
3,400
5,500
2,000
5,700
|
By B a/c (sales)
By Stock on Consignment a/c
By Goods sent on consignment a/c
|
55,000
12,600
10,000
|
|
77,600
|
77,600
|
Y’s Account (Consignee)
|
Particulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Consignment a/c
|
55,000
|
By Bills Receivable a/c (Advance)
By Consignment a/c ( Expenses and bad
debts)
By Consignment a/c (Commission on
sales)
By Bank a/c (Balance received)
|
30,000
3,400
5,500
16,100
|
|
55,000
|
55,000
|
Goods sent on Consignment a/c
|
Particulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Consignment to Y a/c (Loading)
To Trading a/c
|
10,000
50,000
|
By Consignment a/c
|
60,000
|
|
60,000
|
60,000
|
Ledger accounts in the books of
Consignee:
The consignee maintains only one account
in his books regarding the consignment i.e., Consignor a/c
X’s a/c (Consignor)
|
Particulars
|
Amount
Rs.
|
Particulars
|
Amount
Rs.
|
|
To Bills Payable a/c (Advance)
To Cash and bad debts ( Expenses)
To Commission a/c (on sales )
To Bank a/c (Balance)
|
30,000
3,400
5,500
16,100
|
By Cash a/c (Sales)
|
55,000
|
|
55,000
|
55,000
|
The
stock reserve account will be carry forward to the next year and their balance
will then transferred to the consignment a/c – Rs.12,600 on the debit side and
Rs.2,000/- on the credit. This year in the balance sheet the net amount of
Rs.10,600/- will be shown on the assets side as shown under:
|
Particulars
|
Amount
Rs.
|
|
Stock on Consignment
Less: Reserve
|
12,600
2,000
|
|
10,600
|
What would be the
situation if the commission of Y includes del -
Credere commission also? In
that case Y would be able to charge the bad debt of Rs.600/- to X, he will have
to bear the loss himself. The student can
see the profit on consignment will be at Rs.6,300/-.
In this regard it is to be noted that when del –
Credere commission is paid to the consignee, the consignee account is debited
in the books of consignor for both cash and credit sales. But if no such del –
Credere commission is paid, then consignee account be debited for credit sales
and in that case the following entry is passed in books of consignor for credit
sales.
-
Consignment
Debtors a/c Dr
To consignment a/c
ACCOUNTING TREATEMENT FOR NORMAL LOSS AND ABNORMAL
LOSS IN CONSIGNMENT
The
words ‘Normal Loss’ and ‘Abnormal Loss’ refer to basically to the quantity of
goods lost. Such losses have a financial value and are dealt with the following
manner –
|
Basis
|
Normal Loss
|
Abnormal Loss
|
|
1.
Meaning
|
Loss that is expected or unavoidable,
is called Normal Loss
Example: while consigning liquids like
oils, petrol etc. any loss in quantity due to spilling or evaporation is
considered as normal loss.
|
Loss due to any accident or unforeseen
cause is called Abnormal loss.
Example: if the entire or a huge
quantity of oil / petrol is lost due to lorry accident / fire etc. it is
called abnormal loss.
|
|
2.
Insurance claim
**
|
No recovery of insurance claim is
possible in case of normal loss.
|
Insurance company may reimburse a
suitable amount, not exceeding the value of goods lost.
|
|
3.
Accounting
Treatment **
|
Total cost plus expenses should be
divided by the quantity available after normal loss
|
Abnormal loss should be valued in the
same manner as closing stock, and credited to consignment account.
|
|
4.
Journal entry
|
There is no journal entry for normal
loss. It is adjusted by way of quantity deduction only. So average cost per
unit = Total Cost incurred for total quanity
Total quantity less normal
loss
|
a)
For recording value of abnormal loss:
-
Abnormal Loss
a/c Dr
To Consignment a/c
b)
For recording
insurance Claim, and transfer of Net Loss
-
Bank/Insurance Claim Rec’ble a/c Dr
To
Abnormal Loss a/c
|
No comments:
Post a Comment