Normal and Abnormal Loss

Normal loss and abnormal loss are losses that may occur during consignment. Consignment is the act of sending the goods by the manufacturers or producers to their agents for the purpose of the sale of goods. The person sending the goods is called a Consignor (the manufacturer or producer) and the agent who receives the goods is called a Consignee. Let’s understand in detail the nature of normal and abnormal loss. 


Normal and Abnormal Loss

Goods sent on consignment do not become the property of the consignee since only the possession of goods is transferred during consignment. The ownership of goods stays with the consignor until the goods are sold. These goods are recorded as inventory in the books of the consignor and not the consignee.

It is the responsibility of the consignee to sell the goods according to the instructions of the consignor. Once the goods are sold, the consignee deducts his expenses and commission from the sale proceeds and remits the balance to the consignor. If the consigned goods are destroyed, the consignee is not held responsible. The consignor has to bear the burden of the loss. 

There are two types of losses in consignment: Normal Loss and Abnormal Loss. 

Let’s look at them in detail to know the normal loss and abnormal loss difference.


1. Normal Loss

Normal loss is an inherited loss that cannot be avoided. It should be taken into account while valuing the closing stock. For instance, if a consignment of fruits is sent, some of them will be destroyed in loading and unloading while some fruits will not be in a state to be sold. No entry is recorded for normal loss in the books.

To find the cost per unit after the normal loss, the formula used is :

Cost per Unit=  (Total cost+ Expense incurred) / (Total Quantity - Normal Loss)


Solved Example for Normal Loss in Process Costing

Q. A consignment of 10,000 mangoes was sent to the consignee at ₹60 per kg and freight of ₹50,000. The normal loss is considered to be 10%.

Solution. Cost per kg = (600,000 + 50,000) / 9,000 = ₹ 72

(10000 −10% loss)= 9,000

If the unsold quantity is 500 its value will be = 500 × 72 = ₹ 36,000


2. Abnormal Loss

The meaning of abnormal loss is any accidental loss to the consigned goods or loss caused by carelessness. Examples of such losses are loss by theft or loss by fire, earthquake, flood, accidents, war, loss in transit, etc. Such losses are considered abnormal. Sometimes businessmen take an insurance policy for the goods sent or received. Such a policy can only be taken for the coverage of abnormal loss caused to goods.

Abnormal Loss Accounting

  • If a part of goods is stolen, it will reduce the value of stock and in turn, will also reduce the profit on consignment. 

  • The first step is to calculate the cost of goods that are lost. 

  • The consignment account is credited with this value and the abnormal loss account is debited. 

  • It is then transferred to the profit and loss account to arrive at the correct profit or loss of consignment.


Solved Examples for Abnormal Loss Account

1. In the Case of Irrecoverable Loss:

Date

Particulars


Amount

(Dr)

Amount

(Cr)


Abnormal loss a/c

Dr

xx



    To Consignment a/c



xx


(Being value of abnormal loss)




2.

Profit and Loss a/c

Dr

xx



  To Abnormal loss a/c



xx


(Being loss transferred)





2.  In the Case of Insured and Recoverable Loss:


(a) When the Full Amount is Recoverable

Date

Particulars


Amount

(Dr)

Amount

(Cr)


Abnormal Loss a/c

Dr

xx



      To Consignment a/c



xx


(Being abnormal loss valued)





Insurance company a/c

Dr

xx



    To Abnormal Loss a/c



xx


(Being abnormal loss transferred to insurance co.)





b) When the Loss is Partly Recoverable

Date

Particulars


Amount

(Dr)

Amount

(Cr)


Abnormal Loss a/c

Dr

xx



    To Consignment a/c



xx


(Being abnormal loss valued)





Insurance company a/c

Dr

xx



Profit & Loss a/c


xx



    To Abnormal Loss a/c



xx


(Being loss partly recoverable by insurance co. and the balance transferred to profit and loss a/c)




FAQs (Frequently Asked Questions)

Q1. What is the difference between Normal Loss and Abnormal Loss?

Ans. Difference between Normal and Abnormal Loss :

Basis of Difference

Normal Loss 

Abnormal Loss

Cause

It occurs due to the nature of the goods consigned such as evaporation, loss of weight, drying, etc.

Abnormal loss is the loss that may arise due to mishap, mischief, and inefficiency

Avoidable

It is unavoidable

Can be avoided with due precautions

Insurance

Cannot be insured

Can be insured

Journal Entries

No separate journal entries done

Proper journal entries are done in the books of consignor

Treatment of normal loss and abnormal loss in accounts

The cost of normal loss is borne by the remaining goods

The cost of abnormal loss is not adjusted with the cost of the remaining goods

Part of Cost

It becomes a part of the cost

It is charged to the profit & Loss account

Q2. How is Abnormal Loss Treated in Process and Cost Accounting?

Ans. Abnormal loss in cost accounting is the loss that occurs over and above normal loss. In case of abnormal loss in process costing, it can be defined as the loss or spoilage of units in a processing department. Such a loss should not generally occur under efficient and normal working conditions. Abnormal loss indicates that there are one or more serious issues that need to be identified and then fixed in the production operation.