What are the Losses of Consignment?
The loss of consignment is a part of consignment accounting. Consignment is the manufacturer’s act of sending a specific number of goods to the agents for a sale. The one who sends these goods is known as a consigner. The consigner can either be the producer or manufacturer or an assigned person. When the product stocks remaining with the cosigner experiences a loss, it is known as the losses of the consignment. This loss might take place due to destruction or a condition of no-sale for a prolonged period.
There are two types of consignment, and you can get the details about both here.
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Types of Losses of Consignment
There are mainly two types of losses of the consignment. They are normal loss and abnormal loss. Here you can go through all the details about them.
Normal Loss
A normal loss is prominent and it cannot be avoided. It occurs due to physical degradation of the product like breakage, leakage, evaporation, etc. At the time of consignment accounting, the company makes the valuation of the normal loss and deducts it from the total quality.
However, only the quantity of normal loss is calculated by an organization but not it’s worth. Moreover, no separate journals are needed in case of calculating normal loss. The organization always takes the gross profit to contrast the amount of normal loss with it. Furthermore, the organization does not publish any journals for it.
For Example: In the case of the consignment of 1000 kg oil, some might evaporate during the delivery. In such a situation, the amount of broken vaporised oil is considered as a normal loss.
Here the mathematical formula you can apply is:
The total value of goods * unsold quantity of goods/amount of goods that the consumer receives.
Abnormal Loss
Abnormal loss is another significant part of consignment accounting. All losses incurred due to the carelessness or any other drawbacks during delivery comes under abnormal cost. It can also be considered a human-made mistake.
Moreover, the loss in products occurred due to unavoidable circumstances like a flood, fire, earthquake, or en theft comes under abnormal loss.
Any organization remains keen to restrict abnormal losses on their consignments as it hampers the net worth of profit. This can not only lead to the degradation of production for the company.
The organizations make a journal entry for the abnormal losses because they desire to keep records of it. When making a journal note, they make a couple of tables. In the first table, all the data related to an abnormal loss is entered when the loss is not recoverable.
Here are the details of the treatment measures of normal loss and abnormal loss you must know about.
Treatment of Normal Loss
Less amount of treatment takes place for the normal loss as the companies remain aware of it when sending the consignments. In case no goods are correctly sold after sending the consignment, some organizations can follow the formula for understanding the leftover value of the stock. It is:
(The value of goods when no normal loss occurred/total units after the normal loss occurred) * Unsold units.
Most of the organizations (if necessary) make a balance sheet to keep a detailed record of the normal loss over a consignment.
Treatment of Abnormal Loss
As mentioned earlier, the journal is made to account for the abnormal loss of the consignment; here are the details about it.
Procedure 1
Journal entries for the goods where insurance is absent
Profit and Loss A/C
Consignment A/C
Journal entries of the goods where insurance is present
The claim of insurance A/C
Consignment A/C
Journal entry for the compensation on goods given by the insurance company
Insurance claim A.C
Consignment A/C
Profit and Loss A/C
Entering the data into the journal when the organization receives the claim amount from the insurance company.
Details of the insurance claim
Bank A/C
Procedure 2
In the second procedure, the abnormal losses are counted in a separate account known as the abnormal loss account. In this case, the journal entities are made, however, the techniques are different.
Journal entry to transfer loss
Abnormal loss A/C
Consignment A/C
Journal entry to close - for goods that are not insured properly
Profit and Loss A/C
Abnormal Loss A/C
Journal entry to close - for goods that are insured properly
Insured Claim A/C
Abnormal Loss A/C
If a loss is more than Compensation
Profit and Loss A/C
Abnormal loss A/C
Insurance Claim A/C
If claimed received with the help of insurance company
Insurance claim
Bank A/C
FAQs on Accounting for Consignment Losses
1. What are the main types of losses in consignment accounting?
In consignment accounting, there are two primary types of losses that can occur when goods are transferred from the consignor to the consignee:
- Normal Loss: This is an unavoidable loss that occurs due to the inherent nature of the goods, like evaporation, spoilage, or shrinkage. It is considered a part of the process and is not recorded separately.
- Abnormal Loss: This is an avoidable loss that happens due to accidents, negligence, or unforeseen events like theft, fire, or damage in transit. This loss is calculated and recorded separately in the books.
2. What is the key difference between how normal and abnormal losses are treated in accounting?
The main difference lies in how their cost is handled. The cost of normal loss is absorbed by the remaining good units, effectively increasing their per-unit cost. It is not shown as a separate loss. In contrast, abnormal loss is not absorbed by other units. Its value is calculated and transferred to the Profit and Loss Account to show the true financial impact of the accidental loss.
3. How is the value of an abnormal loss calculated?
To calculate the value of an abnormal loss, you must include the cost of the goods lost plus any proportionate non-recurring expenses incurred up to the point of loss. The formula is: Cost of Goods Lost + Proportionate Non-Recurring Expenses (like freight, insurance, and loading charges). This ensures the full cost associated with the lost goods is accurately determined.
4. Why is normal loss not valued or shown separately in the Consignment Account?
Normal loss is considered an expected and unavoidable part of business operations for certain goods. Because it's anticipated, its cost is treated as a part of the total cost of the consignment. This cost is simply spread over the remaining good units, which slightly increases their individual cost. Since it's not a failure or accident but an inherent cost, no separate accounting entry is needed.
5. What is the main purpose of preparing a Consignment Account?
The primary purpose of preparing a Consignment Account is for the consignor to find out the profit or loss from a specific consignment. It acts as a temporary trading and profit & loss account for each batch of goods sent. It records all related incomes (like sales made by the consignee) and expenses (like freight, commission, and losses) to determine the net outcome of the venture.
6. How do non-recurring expenses affect the valuation of closing stock and abnormal loss?
Non-recurring expenses are costs incurred to bring the goods to the consignee's location (e.g., freight, transit insurance). Since these expenses are incurred on the entire batch of goods, a proportionate share must be added to the value of any unsold stock (closing stock) and any goods lost abnormally. This ensures that their value reflects not just the purchase price but also the cost to get them to their current state and location.
7. What happens if goods are insured and an abnormal loss occurs?
If goods are insured, the accounting treatment for abnormal loss changes slightly. The total value of the abnormal loss is still calculated and credited to the Consignment Account. However, the amount received from the insurance company is debited to the Bank or Insurance Company Account. Any difference between the total loss and the insurance claim received is the actual loss, which is then transferred to the Profit and Loss Account.
