Treatment of Abnormal Loss 🔥

Definition: Loss caused by accidental or avoidable reasons.

• Examples: Fire, Theft, Road Accident, Negligence.

Accounting Treatment:

• This is a Real Loss. It must be calculated and removed from Consignment A/c to find the true Trading Profit.
• We credit Consignment A/c with the value of Abnormal Loss.

Valuation Formula 🧮

Value is calculated EXACTLY like Closing Stock. Formula:

Value = Cost of Lost Units + Prop. Direct Expenses (till point of loss)

Journal Entries 📝

1. Remove Loss from Consignment:

Abnormal Loss A/c ...Dr. (Full Value)
    To Consignment A/c

2. Insurance Claim Received:

Bank A/c ...Dr. (Claim Amount)
P&L A/c ...Dr.  (Net Loss)
    To Abnormal Loss A/c

Example 🔥

• Sent: 1000 units @ ₹100.
• Exp: ₹5,000.
• 50 units destroyed by fire in transit.
• Insurance Claim received: ₹4,000.

Valuation of Loss:

• Cost: 50 × 100 = ₹5,000.
• Prop Exp: 5,000 × (50/1000) = ₹250.
• Total Loss Value = ₹5,250.

Net Loss to P&L:

• Total Loss (5,250) - Claim (4,000) = ₹1,250.

Quiz Time! 🎯

💡 Final Wisdom: "Normal Loss is absorbed by the good units. Abnormal Loss is kicked out to the P&L Account. We don't punish the good units for a fire accident!" 🚒

Next up: Invoice Price Method - Hiding the Profit! 🕵️‍♂️