Can anyone explain me why abnormal losses are credited to Trading a/c??? For e.g when goods worth Rs 200000 are consigned and are lost in transit and insurance Co. pays 40%, so in this case entry is:
Bank A/c Dr. 80000
loss due to accident Dr. 120000
To trading A/c 200000
So kindly explain why its going to trading a/c inspite of the fact whengoods are consigned entry made is
Goods sent on consgnmt Dr.
To Trading A/c....
Thanks in Advance
Desperado
(Cost And Management Accountant)
(129 Points)
Replied 19 March 2010
Dear
Regardless of the fact that the query is based on Consignment, Please note that Credit in Trading account indicates revenue inflow, and debit indicates reduction in revenue in the shape of expense and losses, be it amortization or depreciation.
As far as your query is concerned, although Rs. 200,000 should have been the amount of revenue but due to abnormal loss whole of the goods have been destroyed. So the loss should be of Rs. 200,000.(Assuming no amount has been compensated by the insurance co.) if Rs. 200,000 has been debited to "Loss due to accident account", then it would ultimately effect on trading account at the time of closing of the account. The entry, at the time of closing of accounts, would be;
---------------Trading Account, Debit ---------------200,000
---------------Loss due to accident, Credit--------200,000
In the end, Trading account would show Rs. 200,000 in credit side (Revenue due to consignment) and Rs. 200,000 would be debited to trading account, hence profit would be nill.
For the purpose of simplicity i have ignored insurance reimbursements, by considering insurance compensation, only Rs. 120,000 would be debited to trading account at the time of closing the accounts. Still, there would be a profit of Rs. 80,000. i.e.
Goods worth -----------200,000
Goods Lost-------------(120,000) Since 40% has been compensated,
Profit----------------------80,000.
Let me know if confusion still exists.
Best Regards,
Desperado.
Anshika
( CA -Industry- Sr.Accounts Officier)
(141 Points)
Replied 19 March 2010
ya . i agree with above solution
S.K.Agarwal
(Novice)
(72 Points)
Replied 19 March 2010
Sumit Kumar
(Audit Executive)
(278 Points)
Replied 20 March 2010
proper adjustment relating to loss in transit is(say gross loss is Rs.20000)
First entry Abnormal loss A/c Dr 20000
To Trading A/C. 20000
Say insurance claim receivable is Rs.15000
INSURANCE CLAIM Dr 15000
P/L A/c Dr 5000
To Abnormal loss 20000
Desperado
(Cost And Management Accountant)
(129 Points)
Replied 20 March 2010
Dears Agarwal,
I only discussed ultimate effects of the transaction rather than explaining the same from the outset. I was also of the view that the query has sound knowledge regarding the discussed topic. Furthermore, different companies use different types of accounts for the same transaction. If the query has used account other than your understanding then definitely query will in no case start using account as per your advice unless his treatment is incorrect.
To my apprehension, only professional advices should be given at the professional forums unless the contrary is mandatory.
I hope you understand.
Regards,
S.K.Agarwal
(Novice)
(72 Points)
Replied 20 March 2010
S.K.Agarwal
(Novice)
(72 Points)
Replied 20 March 2010
| Originally posted by : Sumit kumar | ||
 |
proper adjustment relating to loss in transit is(say gross loss is Rs.20000) First entry Abnormal loss A/c Dr 20000 To Trading A/C. 20000 Say insurance claim receivable is Rs.15000 INSURANCE CLAIM Dr 15000 P/L A/c Dr 5000 To Abnormal loss 20000 |
 |
Desperado
(Cost And Management Accountant)
(129 Points)
Replied 22 March 2010
| Originally posted by : S.K.Agarwal | ||
|
|
Dear Desperodo read the query again, He is asking why trading account credited again if it has been already credited at the time of goods consigned*. And its right that different company use different accounts but NO company will treat the loss as a profit like you have shown in your solution** Further this forum is for the students also , and query is also asked by a student for exam purpose. And i hope you also understand that in exams there is no use of practical or professional treatment of accounts only theoretical treatment works. Regards |
|
Dear,
First of all, some clarifications are required to be provided to you with regard to your reply, i.e.
* Query has no where asked what you thought i.e. "He is asking why trading account credited again if it has been already credited at the time of goods consigned", rather the question "why abnormal losses are credited to Trading a/c?"
** I will be quite glad if i am shown that where i have made such a Mistake of treating abnormal loss as profit, please let me know?
Besides the aforesaid, sorry to say but your concepts seem dubious to me in the concerned topic. At one place you suggested that correct entries should be "Goods lost in transit ac debited and Goods sent on consignment ac credited" at the same time you have agreed to the solution provided by Sumit, Why correlation exists between the two?
If you want me to solve the query from the initial entry then let me tell you that neither of your's nor of sumit's entries are sequential, furthermore, Faiz also did not mention the entries from the initial stage, which means he is required to be provided suggestion rather than solution.
Let me tell you the two methods exist to resolve the query (only those entries, which are relevant in the current situation);
Method 1:
Insurance Claim Account --------------------80,000Debit
Profit and Loss Account ---------------------120,000Debit
Consignment Account------------------------200,000Credit
Profit or loss on consignment is ultimately closed into either "Profit and Loss A/c" or " Trading A/c".
Method 2:
Insurance Claim Account ---------------------80,000Debit
Profit and Loss Account -----------------------120,000Debit
Abnormal Loss Account------------------------200,000Credit
That would ultimately have the same effect over profitability on trading account, which is ascertained under method 1.
Let me know, if your wrong assumptions and queries have been wiped off or not.
Regards,
Desperado.
S.K.Agarwal
(Novice)
(72 Points)
Replied 22 March 2010
| Originally posted by : Desperado | ||
|
|
Dear, First of all, some clarifications are required to be provided to you with regard to your reply, i.e. * Query has no where asked what you thought i.e. "He is asking why trading account credited again if it has been already credited at the time of goods consigned", rather the question "why abnormal losses are credited to Trading a/c?" ** I will be quite glad if i am shown that where i have made such a Mistake of treating abnormal loss as profit, please let me know? Besides the aforesaid, sorry to say but your concepts seem dubious to me in the concerned topic. At one place you suggested that correct entries should be "Goods lost in transit ac debited and Goods sent on consignment ac credited" at the same time you have agreed to the solution provided by Sumit, Why correlation exists between the two? If you want me to solve the query from the initial entry then let me tell you that neither of your's nor of sumit's entries are sequential, furthermore, Faiz also did not mention the entries from the initial stage, which means he is required to be provided suggestion rather than solution. Let me tell you the two methods exist to resolve the query (only those entries, which are relevant in the current situation); Method 1: Insurance Claim Account --------------------80,000Debit Profit and Loss Account ---------------------120,000Debit Consignment Account------------------------200,000Credit Profit or loss on consignment is ultimately closed into either "Profit and Loss A/c" or " Trading A/c". Method 2: Insurance Claim Account ---------------------80,000Debit Profit and Loss Account -----------------------120,000Debit Abnormal Loss Account------------------------200,000Credit That would ultimately have the same effect over profitability on trading account, which is ascertained under method 1. Let me know, if your wrong assumptions and queries have been wiped off or not. Regards, Desperado. |
|
"For the purpose of simplicity i have ignored insurance reimbursements, by considering insurance compensation, only Rs. 120,000 would be debited to trading account at the time of closing the accounts. Still, there would be a profit of Rs. 80,000. i.e.
Goods worth -----------200,000
Goods Lost-------------(120,000) Since 40% has been compensated,
Profit----------------------80,000".
Shubhankar Limaye
(B.Com.)
(174 Points)
Replied 26 March 2010
In general when the goods are lost by fire or are stolen etc, the cost of such goods is credited to the Trading Account because loss arising from such event is abnormal in nature and such abnormality should not distort the gross profit percentage as would normally be observed.
So the entry is
Goods Lost by Fire A/c (P&L Expense A/c) Dr..
To Trading Account.
Leaving the loss arising due to such event, if kept in trading account would not represent true and fair view. Not only will it distort the gross profit percentage, but also hide the fact that goods are lost by such event from the users of financial statement.
In case of your query, the amount should be credited to Goods sent on consignment A/c. Alternatively if the amount is credited to Trading Account, the entry for goods sent on consignment should be reversed.
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