Q.Distinguish between Normal Loss and Abnormal Loss on consignment, and explain how each is treated while valuing the unsold stock.

A normal loss is absorbed silently into a higher cost per unit for the surviving goods; an abnormal loss is valued separately and taken out of the consignment's ordinary result altogether.

A Normal Loss is a natural, unavoidable and reasonably predictable shortage inherent to the goods themselves or to their ordinary handling — evaporation of a liquid, drying up of a powder, shrinkage in storage. Because it cannot be avoided by any reasonable care, it is never separately valued or shown as a loss figure anywhere. Its only effect on the accounts is that the SAME total cost and non-recurring expenses must now be divided over a SMALLER surviving quantity, so the cost per unit of the goods that remain automatically rises. Cost per unit = (Total cost + Total non-recurring expenses) ÷ (Units sent − Units lost normally).

An Abnormal Loss, by contrast, arises from an accidental or unusual event — fire, theft, an accident in transit, flood — that is neither a natural feature of the goods nor a routine consequence of ordinary handling. Because it is unrelated to selling the goods, it is valued SEPARATELY, at the same cost-per-unit rate already computed (after allowing for any normal loss), and is CREDITED to the Consignment Account so it does not distort the ordinary trading profit; it is debited instead to a separate Abnormal Loss Account. Any insurance claim admitted by the insurer is credited against this loss, and only the remaining, genuinely uninsured shortfall is finally transferred to the Profit and Loss Account. …

Students sometimes try to value a normal loss at cost, as if it were abnormal, or conversely spread an abnormal loss (like a fire) silently across the remaining units instead of valuing and removi …