Learning Materials For Accounting, Management , Finance And Economics.

Wednesday, October 5, 2011

Loss Of Goods On Consignment

The goods are consigned from one place to another. After receiving the goods by consignee, the goods are stored by the consignee before selling them to customers. It is natural that some loss to the goods may take place within that period. The goods may be lost, destroyed or damaged either in transit or in consignee's store. Such loss can be divided into two parts.

1. Normal Loss

The loss which is caused by unavoidable reasons is known as normal loss. For examples shrinkage, evaporation, leakage and pilferage. Such losses form part of cost of goods and no additional adjustment is required for this purpose. The normal loss is borne by goods units. The quantity of such loss is to be deducted from the total quantity sent by the consignor. The following formula may be used for the valuation of unsold stock.
Value of closing stock= (Total value of goods sent/Net quantity received by consignee) X unsold quantity

Net quantity received = Goods consigned quantity - Normal loss quantity.

2. Abnormal Loss

The loss which could be avoided by proper planning and care are abnormal loss. They are like theft, riots, accidents, fire, earthquake etc. These losses could occur in transit or in consignee's store and solely to be borne by consignor.
The abnormal loss should be adjusted before ascertaining the result of the consignment. The valuation of abnormal loss is done on the same basis as the unsold stock is valued. The journal entries for abnormal loss in different cases are as under:

If goods are not insured

For recording abnormal loss:
Abnormal loss A/C ...........Dr.
To consignment A/C
For abnormal loss transferred:
Profit and loss A/C........Dr.
To abnormal loss A/C

If goods are insured and claim admitted in full

Bank/Consignee's/Insurance company A/C...........Dr.
To consignment A/C

If goods are insured and claim admitted in partial

Profit and loss A/C...........Dr.(Net loss amount)
Insurance Co./bank/consignee's A/c.......Dr.(Claim admitted)
To consignment A/c (total loss amount)

The following method should be followed while valuing abnormal loss:

A) Goods sent on consignment(at cost price)...............$ XXX
B) Add: Non-recurring expenses:
Consignor's expenses...................................................$ XXX
Consignee's expenses...................................................$ XXX
Total cost before abnormal loss A+B.............................$ XXX

Value of abnormal loss = (Total cost/Total units consigned) X abnormal loss units.