WHAT IS LOADING

12.2     LOADING

12.4.1     WHAT IS LOADING

You know that the invoice price is obtained by adding a certain amount of profit to the cost price. The amount of profit which is added to the cost in order to arrive at the invoice price is called loading. In other words, loading is the difference between the invoice price and the cost price

Loading = IP – CP 

For example, if the invoice price is Rs. 10,000 and the cost price is Rs. 7,500, the amount of loading will be

Loading =1P - CP or Number of units x (IP per unit - CP per unit)

= 10,000 -- 7,500

= Ks. 2,500.

If the invoice price or the cost price is given and the profit (lauding) is given in the form of percentage either on IP or CP, the loading can be worked out directly in the same manner as we worked out the IP or CP in the examples under sub-section 12.3.

 

12.4.2     ITEMS WHICH INVOLVE LOADING

Loading is usually involved in all such items which are recorded at the invoice: price in the Consignment Account. These items are:

 

1 Opening Stock

2 Goods Sent on Consignment

3 Goods Returned by the Consignee

4 Closing Stock.

 

You have to compute the loading in respect of all the above items and make necessary adjustments it1 books of the consignor.

 

12.4.3     ADJUSTMENT OF LOADING

You know the profit is the difference, between selling price and cost price. 1n.Consignment Account prepared earlier, the goods sent on consignment and the other related items were shown at cost. Hence you had no problem in computing the profit. But, when the goods sent on consignment and other related items are shown in the Consignment Account at invoice price, it becomes necessary to adjust the loading in the Consignment Account so as to bring down the invoice price to the level of cost. If such adjustment is not done, the profit figure will be incorrect. There is also a possibility that the Consignment Account shows loss because the difference between the selling price and the invoice price is generally small which cannot cover all expenses. Look at figure 12.1 and see the difference between the actual profit and the profit without adjustment. The profit thus calculated will be the difference between sales and invoice price. 

From Figure 12.1 it is clear that if no adjustment is made the profit will be Rs. 2,000 whereas the actual profit is Rs. 5,000 Therefore, in order to calculate the actual profit earned on any consignment all the items shown at invoice price are to be brought down to the level of cost by adj u sting the amount of loading on each of them. Let us now take the items involving loading one by one and see how the necessary adjustments are made.

1 -Opening Stock: Opening stock is always shown on the debit side of Consignment Account, in case the stock is shown at invoice price, the difference between the invoice price and the cost price or the stock will he shown on the credit side of the Consignment Account by as sine the following journal entry.

Stock Reserve A/c – Dr.

To Consignment A/c

(Being unloading on opening stock)

2 Goods Sent on Consignment: Goods sent on Consignment are shown on the debit side of Consignment Account. In order to nullify the effect of invoice price, the difference between the invoice price and the cost price in respect of goods sent on consignment will be shown on the credit side of the Consignment Account by passing the following journal entry.

Goods Sent on Consignment A/c Dr.

To Consignment A/c

(Being unloading on goods sent on consignment)

3 Goods Returned by the consignee : As the return of goods is shown on the credit side of Consignment Account, the adjustment for the loading will be made on the debit side of consignment Account with the help of the following journal entry.

Consignment A/c   Dr.

To goods Sent on Consignment A/c

(Being loading on goods returned) 

4 Closing Stock: Since closing stock is shown on the credit side of Consignment Account, the adjustment for the loading will be made on the debit side with the help of the following journal entry.

Consignment A/c   Dr.

To Stock Reserve

(Being unloading on closing stock)

Thus you will observe that the adjustment entry for Loading in the Consignment Account is made on the opposite side of the original entry. For example the closing stock is shown on the credit side of the Consignment Account whereas its adjustment is shown on the debit side of the Consignment Account. This is how the effect of loading in Consignment Account is neutralized and the invoice price is brought down to the cost level. You should remember that the adjustment for loading is to be made in the books of the Consignor only. The consignee does not record any entries for the items involving loading. Therefore no adjustment is needed in his books.

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