LOSS OF GOODS

 11.4 LOSS OF GOODS

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 and

b) Abnormal Loss

Let us discuss the exact nature of these losses and their accounting treatment,

11.4.1 Normal Loss

It is a loss which is due to tile inherent nature of the goods consigned. It may arise in the process of loading and unloading of goods, breaker of bulk pieces into smaller ones, weighing or due to evaporation, processing, etc. For example while loading or unloading 01. Weighing coal, some part is bound to fall down in powdered form. Similarly the petroleum products are bound to lose 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 inner characteristics of the goods, it is ‘called a normal loss.

Nonnal loss is not shown separately in the books of accounts. The cost of 11011nal 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 12% 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 x 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 nonnal 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 call also be computed directly (without calculating the inflated cost per unit) with the help of the following formula.

Total Cost of Goods Consigned x Unsold Units/ Remaining Units

Look at Illustration 4 and see how the closing stock is valued when there is normal loss

Illustration 4

Ram consigned 2,000 tons of coal at Rs, 50 per ton to Shyam of Delhi, He paid Rs. 20,000 as freight. Due to normal wastage 1,950 tons only were received by Shyam. He paid Rs. 5,000 as unloading charges. Goods sold were 1,300 tons. You are required to calculate the value of closing stock.

Solution

11.4.2 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 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=Na of Abnormal Loss Units x Cost per Unit

Non-recurring Expenses up to the point of loss x Na. of Abnonnal Loss Units/ No. of Units Consigned 

Since the abnormal loss is not incidental to the consignment, il 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 a
ii) Partially Insured
iii) Fully Insured

1) When the 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 I following entry.

Profit & Loss A/c               Dr
To Abnormal Loss A/c
(Being Abnormal, Loss transferred to P&L A/c

2) When the 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 I following entry.

Profit & Loss A/c Dr
To Abnormal Loss A/c
(Being Abnormal, Loss transferred to P&L A/c

3) When the loss is partially insured: In case. The abnormal loss is insured 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.

4) When the toss 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,

Look at Illustration 5 and see how abnormal loss is calculated and trialed in the books of accounts.

Illustration 5

Philips Radio Company consigned 100 transistors to their agent Paul Radios, Delhi. The cost ' price of each transistor is Rs. 75. The consignors paid Rs. 200 for freight, Rs. 50 for. Cartage and Rs. 400 for insurance. Five transistors were totally destroyed in transit. The insurance claim of Rs. 300 was admitted by the insurance company. The consignee took the delivery of 95 radios and spent Rs. 190 for clearing charges, Rs. 95 for cartage, Rs. 250 on godown rent and Rs. 150 as selling expenses. They sold all the units at Rs I00 each. Paul Radios are entitled to 5% commission on total sales. The balance due was remitted by way of a bank draft. Calculate the abnormal loss and prepare necessary ledger accounts in tile books of both the parties.

Solution

Abnormal Loss = Number of Abnormal Loss Units x Cost Price per Unit +

On-recurring expenses before loss x Abnormal Loss Unit/Total Unit

=5 x 75 + (650 x 5/100)

= 375 + 12.50

= Rs. 407.50 say Rs. 4.08

Books of Philips Radio Company

Consignment Account

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 affected because the expenses incurred after reach 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. Look at Illustration 6 and see how the abnormal Ioss and the value of closing stock is calculated when the abnormal loss occurs in the godown of the consignee.

Illustration 6

Vanaspati Ltd. consigned 5,000 kg, of Vanaspati ghee to Ashoka Dealers, Chandigarh. Each kg. of ghee costs Rs. 8. Vanaspati Ltd. paid Rs 50 for carriage, Rs. 250 for packing and Rs. 200 for insurance in transit.

After three months from the date of the consignment of goods Ashoka Dealers reported that 3,500 kg. of ghee was sold @ Rs. 9.50 per kg. and expenses were Ks. 500 on godown rent and Rs. 750 on salesmen salary. Ashoka Dealers are entitled to a commission of 5% on sales 500 kg. of ghee was accidentally destroyed in the godown. Insurance claim of Rs. 3,500 was admitted. Prepare the necessary ledger accounts in the books of both the parties.

Solution
Books of Vanaspati Ltd.
Consignment Account

Note: Abnormal loss has been worked out as follows:
Cost of 500 units = 4,000
(500 x 8)
Add Proportionate
Non-recurring expenses
(500/5,000x500)=4,050

You have learnt that when abnormal loss occurs in the godown of the consignee the closing stock valuation is not affected. But it is not so when the abnormal loss occurs in transit. The closing stock valuation is also affected due to abnormal loss in transit because some non- recurring expenses may be incurred after the loss has taken place. Hence, when such loss occurs in transit, you will have to distinguish between the non-recurring expenses incurred before the loss and the non-recurring expenses incurred after the loss. The non-retuning expenses incurred before the loss relate to the total units consigned whereas the non-recuing expenses incurred after the loss relate to the remaining units (total units' rninus abnormal loss units) only. So, the expenses before the loss will be proportionately divided amongst the total unils, whereas the expenses incurred after the loss will be proportionately divided amongst the remaining units.

Look at Illustration 7 and see how closing stock and abnormal loss are calculated and treated when such a loss occurs in transit.

Illustration 7

On June 10, 1988, Modi Br Co., Patiala consigned 500 cases of goods costing Rs. 150 each  to Sethi & Co., Calcutta. On the same date, the consignor paid Rs. 2,500 for freight and carriage Rs. 1,000 as loading charges, and Rs.1, 200 for insurance. On July 1, 1988 the consignee paid Rs. 1,809 for clearing charges, Rs. 1,750 for warehousing and storage charges, and Rs. 900 for packing and selling expenses. He also remitted a bank draft for Rs. 15,000 as an advance against the consignment. On July 5, 1968 they sold 275 cases at Rs. 200 each. Sethi & Co. are entitled to 5% commission on the gross proceeds of sales. It is found that 50 cases have been lost in transit. Sethi & Co submitted an account sale on July. 10, 1988. Prepare the necessary ledger accounts in the books of the consignor. 

Solution

Notes:  
1 All expenses incurred by the consignor and the clearing charges incurred by the consignee are non-recurring expenses.
2 Abnormal Loss:
Number of Abnormal Loss Units x Cost Price per Unit
+ (Non-recurring Expenses up to the point of loss x Abnormal Loss Units/Total Units Consigned)

3) Valuation of Closing Stock: 

Number of Closing Units = 175 

Cost Price Per Unit = Rs. 150 

So, Cost of Unsold stock will be = 175 x 150 = Rs. 26,250 

Non-recuing expenses before loss = Rs. 4,700 

(2,500 + 1,000 + 1,200)

Since these expenses are incurred on total consignment i.e., 500 units, the proportionate amount of expenses for consignment stock will be.

4,700 x 175/500 Rs. 1,645

Non-recurring expenses after loss = Rs. 1,800 i.e., clearing charges of the consignee, as they are incurred after the consignment reaches the consignee they would relate to 450 units (500-50). Hence, the proportionate amount of these expenses for consignment stock will be 1,800 x 1751450 = Rs. 700
Now the value of closing stock will be as follows:

Cost of unsold stock (175 x 1150) =Rs.26, 250

Add proportionate Expenses =Rs.1, 645

i) Before loss        =Rs. 700

ii) After loss       =Rs. 28,595

Value of Unsold stock

The above method of valuation of closing stock can be put in the form of a formula which is as follows:

Number of Unsold Units x Cost price per unit

+ Non-recurring expenses before loss x Unsold Units/Total Units

+ Non-recurring expenses before loss x Unsold Units/Total Units-Abnormal Loss Units

11.4.3 Where Normal and Abnormal Losses Occur Simultaneously

In the Illustration done earlier you had either the normal loss or the abnormal loss on the consignment. But it is quite possible that both normal and abnormal losses occur simultaneously in connection with the same consignment. In such a situation, the abnormal loss will be calculated in the same manner as discussed in sub-section 11.4.2. But, the valuation of closing stock needs special attention as the normal loss is also involved. In order to calculate the value of closing stock the following procedure will be followed:

i)     Take the total cost of goods consigned and add all the non-recuing expenses incurred by the consignor as well as the consignee.

ii)    Deduct the quantity and cost of abnormal loss from the total number of goods consigned and the cost as obtained in (i) above respectively.

iii)   Deduct the quantity of normal loss from the quantity worked out in (ii) above without making any adjustment in cost.

iv)   Now you will be left with the cost of goods of the good units with the consignee. Calculate cost per unit of these-units by dividing the cost (remaining after deducting the cost of abnormal loss) by the number of good units.

v)    Multiply the number of unsold units with the cost per unit obtained in

iv)   Above to arrive at the value of unsold stock.

Look at Illustration 8 and see how cost of abnormal loss and the value of unsold stock are calculated when the normal and abnormal losses occur simultaneously.

Illustration 8

Deepak Oil Mills, Cochin consigned 2,500 kg. of castor oil to Madhu & CO., Varanasi on April 1, 1987. The cost of oil was Rs. 18 per kg. The consignor paid Rs. 900 towards carriage, freight and insurance in transit. During transit 250 kg. Oil was accidentally destroyed for which the insurance company paid Rs. 2,200 in full settlement of the claim directly to the consignor.

Madhu & Co. took delivery of the consignment on April 10 and accepted a bill drawn on them by Deepak oil Mills of Rs. 5,000 for 2 months. On June 30, 1987, Madhu & Co. reported that 1,750 kg. Were sold at Rs. 25 per kg. The expenses of the consignee were Rs. 1,850 towards godown rent, advertisement and salaries of salesmen. Madhu & Co. charged a commission of 3% plus 2% Del credre commission. Madhu & Co. further reported a loss of 20 kg. Due to leakage. Prepare the necessary ledger accounts in the, books of the consignor.

Check Your Progress-B

1         Fill in the blanks

i)     Losses occur either due to inherent nature of the product or due to operation of

ii)     Loss of weight due to evaporation is a .................. loss.

iii)    Normal loss affects the valuation of..................

iv)    Abnormal loss is .................. to Consignment Account.

v)     Insurance claim is .................. to Abnormal Loss Account. The amount of loss not accepted by the insurance company is transferred to................... Account

2 How will you treat abnormal loss if,

a) loss is fully insured: .....................................................

b) loss is uninsured: ....................................................

C) loss is partly insured: ..............................................