Q.A sent 200 cases of goods to B, costing ₹500 per case, and paid ₹10,000 towards freight and insurance while despatching them. Before B could sell any of the goods, 20 cases were completely destroyed by fire in B's godown. The insurance company admitted a claim of ₹9,000 in full settlement. B sold the remaining 180 cases for ₹1,25,000, and was entitled to a commission of 5% on sales. Ascertain the value of the abnormal loss, and the amount to be debited to the Profit and Loss Account on account of the fire.

A loss by fire is an abnormal loss, valued at the same cost-per-case rate as the rest of the consignment; only the shortfall not covered by the insurance claim is a genuine loss to A.

Cost per case = (2,00,000 + 10,000) ÷ 200 = 550; abnormal loss = 20 × 550 = 11,000; net loss = 11,000 − 9,000 = 2,000.

Total cost of the 200 cases sent = 200 × ₹500 = ₹1,00,000, plus freight and insurance of ₹10,000, giving a total cost of ₹1,10,000. There is no normal loss here, so the cost per case = 1,10,000 ÷ 200 = ₹550.

The destruction of 20 cases by fire, before any sale could take place, is an ABNORMAL loss — it is an accident, not a natural feature of the goods, so (unlike a normal loss) it must be separately valued, at the same cost-per-case rate that applies to the rest of the consignment:

Value of the abnormal loss = 20 × 550 = ₹11,000.

This ₹11,000 is credited to the Consignment Account (removed from the ordinary trading result of selling the remaining 180 cases) and debited to a separate Abnormal Loss Account. The insurance company admitted a claim of ₹9,000, which is credited to the Abnormal Loss Account; the balance — the genuinely uninsured shortfall — is transferred to the Profit and Loss Account as a loss:

Net loss due to fire = 11,000 − 9,000 = ₹2,000.

This ₹2,000 is a loss arising from an accident, kept entirely separate from the ordinary profit A will separately earn from selling the remaining 180 cases for ₹1,25,000 (after B's 5% commission of 1,25,000 × 5% = ₹6,250) — the fire loss must never be netted against, or confused with, the ordinary trading result of the consignment.

Students sometimes value the abnormal loss at the plain original cost of ₹500 per case, forgetting that the proportionate freight and insurance A already paid on the WHOLE consignment must also be included in the rate used to value the destroyed cases, exactly as it would be for any unsold stock.