Normal Loss and Abnormal Loss on Consignment

Goods sent over a distance, particularly bulk or liquid goods, are almost never received by the consignee in the exact quantity despatched. The shortage that turns up is classified into two very different categories, and this classification decides the whole accounting treatment.

Normal loss is a loss that is a natural, unavoidable, and expected part of handling that particular type of goods — evaporation of a liquid, drying up of a commodity, natural wastage in handling loose goods, and so on. It cannot be insured against because it cannot be prevented, and no one is at fault for it. Accounting treatment: a normal loss is never separately valued or shown. Instead, the cost of the goods actually consigned is simply spread over the reduced (post-loss) quantity when computing the cost per unit for valuing both sales and unsold stock. In effect, the normal loss quietly raises the effective cost per unit of the good units that remain, rather than appearing anywhere as a loss figure by itself.

Abnormal loss is a loss arising from an identifiable, avoidable cause — fire, theft, an accident in transit, flood, or similar events. It is not a routine feature of trading in the goods concerned, and it can generally be insured against. Accounting treatment is very different from normal loss:

1. The proportionate cost of the lost units, plus their proportionate share of every direct expense incurred up to the point at which the loss occurred, is worked out exactly as for stock valuation, and this becomes the value of the abnormal loss.
2. This value is removed from the Consignment Account (credited there) and transferred to a separate Abnormal Loss Account, so that the abnormal, one-off event does not distort the normal trading profit or loss on the consignment. …