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A MUST KNOW CHALLENGE for STUDENTS

CA Mohit Mohan (c.a. profession) (557 Points)

05 July 2009

Why Goods destroyed by fire is credited to Trading account ? Putting it on credit side will increase Gross profit......... SURPRISING........

Why abnormal Loss is shown on credit side of Consignment account? Putting it on credit side Increase Profit.... SURPRISING........

I will give answer with LOGIC with PROPER EXPLANATION.... But students should try giving me answer.... This question is only for students ..... This is the basic question every student shud know.. thats why i am posting here......

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3 Replies

Satish (CA Final Student) (479 Points)
Replied 05 July 2009

Goods destroyed by fire is credited to nullify the effect of debit on account of purchases of such goods on profit & loss account. To give the effect of actual loss, the profit & loss is again debited by the amount of actual loss.

supriya (student) (159 Points)
Replied 05 July 2009

Basically trading account is prepared to show how much profit / loss is made by the firm from trading of goods. So if goods purchased are lost due to fire this loss is not due to trading of goods and hence it is not charged to trading account. This loss is shown in P&L A/c. Same is the case with Consignment A/c where consignment account is prepared to shown profit / loss occured by consigning the goods. Correct me if i am wrong.

(Guest)

The credit is given because as the goods are damaged it is no longer saleable. It should not be a part of closing stock and hence it is credited to the trading a/c separately.

It wont result in increasing the profit because the debit is aleady given for the Purchase or if it already existing in the Op. Stock.

This will nullify the account.