Consignment- Accounting Losses on Consignment

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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

FAQ (Frequently Asked Questions)

Q1. Why is it Essential to Track the Abnormal Loss for the Consignment in a Business Organization?

Answer: Sending consignments is a normal phenomenon in the case of an organization. However, there can be losses on consignment that the entity has to bear. There are two types of losses: normal and abnormal losses.  

The abnormal losses need to be documented as it directly affects the stock of the company. The executive documents the abnormal losses in a balance sheet as they can take future references whenever needed. On the other hand, documenting the normal losses is not needed as it normally occurs, While making the balance sheets, the consignment executives need to follow the journaling rules to make sure all the entries are present in the right manner.  

Q2. Why Do Business Organizations Not Take Normal Losses Seriously?

Answer: Most business organizations do not take the normal losses seriously because it occurs naturally. Some entities might not take any records related to the worth of the normal losses as it is not huge and unavoidable in nature. However, there is a thin fine line between normal loss and abnormal loss. No entities can consider the losses related to ill-handling as the normal loss. Accountants consider it an abnormal loss and observe the level of such losses in worth. In case the abnormal losses are more, a business entity should check its level and improve the delivery features of the consignment as per necessity.