Stocks that the organisation deals with may be lost on account of abnormal reasons.

Abnormal loss stocks are to be valued at cost. The principles that are used in the valuation of assets are used even in the case of valuing abnormal loss stocks. Recording Journal Entry We know that ledgers provide the information we need in accounting and anything that gets into the ledger should be through the journal. Even this forms a transaction that should be recorded through the journal.

Debit Asset a/c The value of abnormal loss stock represents a temporary asset. The organisation would make efforts to realise this asset in a number of different ways like selling the salvaged stock, insurance realisation etc. Thus a temporary asset account by name "Abnormal Loss Stock a/c" is created and used for this purpose. [Abnormal Loss Stock a/c Real a/c Debit what comes in.] Many a times we use the words "Abnormal Loss a/c" and consider it a nominal account which is also an accepted practice. We assume it to be a real account to enable an easier understanding of the transactions involving abnormal loss stocks. Some times a name that indicates the reason for the loss (like Stock Lost by Fire Accident) is preferred in place of a general name like "Abnormal Loss". Whatever may be the name we give it and the nature we attribute to the account, it is a temporary account.

Credit The value of abnormal loss stock represents the value of goods/stock that has not been used for trading purposes. To reveal the cost of goods sold, the value of stock unused for trading activity is to be deducted from the total value of goods. For this the following ledger account would be credited depending on the time of recording the transaction, what comprises the value of stock drawn and the account in which the related value exists at the time of recording the entry.
o

Trading a/c Generally, at the end of the accounting period, the balances (amounts) in all the ledger accounts which go into the value of goods/stock, are closed by transfer to the "Trading a/c". This amounts to debiting the "Trading a/c" with the total value of goods/stock.

Thus the value of abnormal loss stock has to be credited to the "Trading a/c" in which the total value of goods/stock is existing as a debit balance. Journal/Ledger Hide/Show Journal in the books of M/s __ for the period from ____ to _____ Date Dec 31st V/R No. Particulars Abnormal Loss Stock a/c To Trading a/c Dr L/F Debit Amount (in Rs) 24,000 24,000 Credit Amount (in Rs)

[For the value of goods lost on account of abnormal reasons.] Dr Date Particulars Abnormal Loss Stock a/c J/F Amount (in Rs) Date Particulars J/F Cr Amount (in Rs) xxx

31/12/05 To Trading a/c

24,000 31/12/05

Dr Particulars To Opening Stock To Purchases To Direct Expenses To Gross Profit

Trading a/c Amount (in Rs) xx xx xx xx xxxx Particulars By Sales By Abnormal Loss Stock By Closing Stock

Cr Amount (in Rs) xxx 24,000 xxx xxx

Goods Consumed a/c Where the "Goods Consumed a/c" is used, the balances (amounts) in all the ledger accounts which go into the value of goods/stock (including opening stock) are transferred to it. Thus the "Goods Consumed a/c" would hold the total value of stock (as a debit balance). Thus the value of abnormal loss stock has to be credited to the "Goods Consumed a/c" in which the total value of goods/stock is existing as a debit balance.

Journal/Ledger Hide/Show Journal in the books of M/s __ for the period from ____ to _____ Date Dec 31st V/R No. Particulars Abnormal Loss Stock a/c To Goods Consumed a/c Dr L/F Debit Amount (in Rs) 24,000 24,000 Credit Amount (in Rs)

[For the value of goods lost on account of abnormal reasons.] Dr Date Particulars Abnormal Loss Stock a/c J/F Amount (in Rs) Date Particulars J/F Cr Amount (in Rs) xxx

31/12/05 To Goods Consumed a/c

24,000 31/12/05

Dr Particulars To Opening Stock To Purchases To Direct Expenses

Goods Consumed a/c Amount (in Rs) xx xx xx xx xxxx Particulars By Abnormal Loss Stock By Closing Stock By Trading a/c(?)

Cr Amount (in Rs) 24,000 xxx xxx xxx

Purchases a/c Where the following conditions exist, we can credit "Purchases a/c" with the value of abnormal loss stock.

The stock lost on account of abnormal reasons is physically relatable to the stock that has been purchased during the current period. There are no direct expenses in relation to the stock purchased during the current period (Or) The value of abnormal loss stock does not include the direct expenses incurred during the current period

Journal/Ledger Hide/Show Journal in the books of M/s __ for the period from ____ to _____ Date 1st 31st V/R No. Particulars Abnormal Loss Stock a/c To Purchases a/c Dr L/F Debit Amount (in Rs) 24,000 24,000 Credit Amount (in Rs)

[For the value of goods lost on account of abnormal reasons.] Dr Date Particulars Abnormal Loss Stock a/c J/F Amount (in Rs) Date Particulars J/F Cr Amount (in Rs) xxx

31/12/05 To Purchases a/c

24,000 31/12/05

Dr Particulars To Cash/Bank/Crs

Purchases a/c Amount (in Rs) Particulars

Cr Amount (in Rs) 24,000 xxx

xx By Abnormal Loss Stock By Trading a/c (?) (Or) Goods Cons a/c xxxx

xxx

Stock Losses (Abnormal) Where such transactions occur frequently, the organisation may create a controlling account by name "Stock Lost a/c". This is a nominal account that gives the information relating to the total value of stock that has been lost on account of abnormal reasons during the accounting period. Jurnal/Ledger Hide/Show Journal in the books of M/s __ for the period from ____ to _____ Date V/R Particulars L/F Debit Credit

No. Dec 31st Abnormal Loss Stock a/c To Stock Losses (Abnormal) a/c [For the value of goods used in the construction of assets.] Dr Date Particulars Abnormal Loss Stock a/c J/F Amount (in Rs) Date Dr

Amount (in Rs) 24,000

Amount (in Rs) 24,000

Cr Particulars J/F Amount (in Rs) xxx

31/12/05 To Stock Losses (Ab) a/c

24,000 31/12/05

Dr Particulars To Trading a/c (Or) Goods Cons. a/c

Stock Losses (Abnormal) a/c Amount (in Rs) Particulars

Cr Amount (in Rs) 24,000 xxx

xx By Abnormal Loss Stock xxxx

The "Stock Losses (Abnormal) a/c" would be closed at the end of the accounting period by transfer to either the "Trading a/c" or "Goods Consumed a/c" or "Purchases a/c" depending on where the value related to the stock drawn is included.

Disposing Abnormal Loss Stock We will come across the following additional transactions relating to disposal of abnormal loss stock

Expenses Incurred Journal/Ledger :: Hide/Show The salvaged stock may be in a saleable condition or completely useless. There may be instances when the salvaged stock can be brought into saleable condition by bearing certain expenditure. This expenditure may be paid in cash or by cheques or may have been incurred and not yet been paid.

Debit Abnormal Loss Stock a/c

Since the amount spent is for the purpose of bringing the abnormal loss stock into saleable condition would amount to brining the asset by name "Abnormal Loss Stock"into usable condition, the expenditure should go into the value of the asset.

Thus the "Abnormal Loss Stock a/c" is debited with the amount of expenditure incurred.
o

Credit

The expenditure incurred may be credited to

Cash a/c

If the expenses are paid out in cash [Cash a/c Real a/c Credit what goes out.]

Bank a/c

If the expenses are paid by cheques [Bank a/c Personal a/c Credit the benefit giver.]

Expenses Payable a/c (Or) Party/Creditors a/c

If the expenses are still to be paid [Expenses Payable a/c (Or) Creditor/Party a/c Personal a/c Credit the benefit giver.] Note: Any nominal account prefixed/suffixed by the terms outstanding, prepaid, still receivable, still payable etc., is a personal account and not a nominal account

Journal in the books of M/s __ for the period from ____ to _____ Date Dec 31st V/R No. Particulars Abnormal Loss Stock a/c To Cash a/c Dr L/F Debit Amount (in Rs) 1,000 1,000 Credit Amount (in Rs)

[For the amount spent on the abnormal loss stock to bring it into saleable condition paid in cash.] Dec 31st Abnormal Loss Stock a/c To Bank a/c Dr 2,800 2,800

[For the amount spent on the abnormal loss stock to bring it into saleable condition paid by cheques.] Dec 31st Abnormal Loss Stock a/c To Exp. Payable (Or) Party/Creditors a/c Dr 1,200 1,200

[For the expenditure incurred on the abnormal loss stock to bring it into saleable condition which is still payable.] Dr Date Particulars Abnormal Loss Stock a/c Amount (in Rs) Cr Particulars J/F Amount (in Rs) xxx

J/F

Date

16/08/05 To Purchases a/c To Cash a/c To Bank a/c To Exp. Payable.

24,000 31/12/05 1,000 2,800 1,200

Sale Realisation Journal/Ledger :: Hide/Show The salvaged stock may be directly sold (if in a saleable condition) or after getting them repaired or refurbished.

The sale proceeds may be received in cash or by a cheques or may be still receivable
o

Credit Abnormal Loss Stock a/c

Since the asset represented by the "Abnormal Loss Stock a/c" is being disposed off, it amounts to the asset moving out of the organisation.

Thus the "Abnormal Loss Stock a/c" is credited with the amount of sale realisation
o

Debit

The sale proceeds may be debited to

Cash a/c

If the proceeds are received in cash

[Cash a/c Real a/c Debit what comes in.]

Bank a/c

If the proceeds are received by cheques [Bank a/c Personal a/c Debit the benefit receiver.]

Proceeds Receivable a/c (Or) Party/Debtors a/c

If the proceeds are still to be received [Proceeds Receivable a/c (Or) Debtor/Party a/c Personal a/c Debit the benefit receiver.] Note: Any nominal account prefixed/suffixed by the terms outstanding, prepaid, still receivable, still payable etc., is a personal account and not a nominal account

Journal in the books of M/s __ for the period from ____ to _____ Date Dec 31st V/R No. Particulars Cash a/c To Abnormal Loss Stock a/c [For the amount realised on the sale of abnormal loss stock in cash.] Dec 31st Bank a/c To Abnormal Loss Stock a/c [For the sale proceeds of abnormal loss stock received through a cheques.] Dec 31st Proc. Receivable (Or) Party/Debtors a/c To Abnormal Loss Stock a/c Dr 2,900 2,900 Dr 2,400 2,400 Dr L/F Debit Amount (in Rs) 4,000 4,000 Credit Amount (in Rs)

[For the sale of salvaged stock and the sale proceeds still receivable.] Dr Date Particulars J/F Abnormal Loss Stock a/c Amount (in Rs) Date Particulars J/F Cr Amount (in Rs) 4,000 2,400 2,900

16/08/05 To Purchases a/c To Cash a/c To Bank a/c To Exp. Payable

24,000 31/12/05 By Cash 1,000 By Bank 2,800 By Pro. Rec 1,200

Insurance Realisation Journal/Ledger :: Hide/Show Where the stock has been insured with one or more insurance companies, the insurance company would pay the amount of compensation based on the contract of insurance.

The contract of insurance being a contract of indemnity, the total amount of compensation received from all the insurance companies together would be not more than the total loss incurred.

The insurance amount may be recorded directly after it has been received or immediately on the insurance company accepting the claim.
o

Credit Abnormal Loss Stock a/c

Since the asset represented by the "Abnormal Loss Stock a/c" is being realised (though not physically given away) or disposed off, it amounts to the asset moving out of the organisation. Thus the "Abnormal Loss Stock a/c" is credited with the amount of sale realisation
o

Debit

The insurance amount may be debited to

Bank a/c

Where the insurance amount has been received from the insurance company and where no entry has been recorded for the amount the insurance company has accepted to pay.

[Bank a/c Personal a/c Debit the benefit receiver.]

Insurance Receivable (or Insurance Company) a/c

Where the insurance company has accepted to pay and the amount has not yet been received, the amount may be shown as an asset (as a debtor). This may be shown in the name of "Insurance Receivable a/c" or the "Insurance Company a/c" [Insurance Receivable (or Insurance Company) a/c Personal a/c Debit the benefit receiver.] Note: Any nominal account prefixed/suffixed by the terms outstanding, prepaid, still

receivable, still payable etc., is a personal account and not a nominal account Journal in the books of M/s __ for the period from ____ to _____ Date Dec 31st V/R No. Particulars Bank a/c To Abnormal Loss Stock a/c [For the insurance amount relating to the abnormal loss stock realised from the insurance company.] Dec 31st Insurance Receivable (Company) a/c To Abnormal Loss Stock a/c [For the insurance amount accepted to be paid by the insurance company which is still receivable.] Dr Date Particulars Abnormal Loss Stock a/c J/F Amount (in Rs) Date Particulars J/F Cr Amount (in Rs) 4,000 2,400 2,900 5,000 2,500 Dr 2,500 2,500 Dr L/F Debit Amount (in Rs) 5,000 5,000 Credit Amount (in Rs)

16/08/05 To Purchases a/c To Cash a/c To Bank a/c To Exp. Payable

24,000 31/12/05 By Cash 1,000 By Bank 2,800 By Pro. Rec 1,200 By Bank By Ins. Rec

Commission on Sale Where there is a commission being paid or payable on the sale of abnormal loss stock it may be
o o

Deducted from the sale proceeds received/receivable and only the net proceeds may be brought into account Recorded just like any other expenditure that goes into the value of the Abnormal Loss Stock

Profit/Loss on Disposal Journal/Ledger :: Hide/Show The "Abnormal Loss Stock a/c" may carry a balance after having sold the salvaged stock and realising the insurance amount.

If there is a debit balance it represents the amount of asset value that is unrealisable and as such a loss. Though, it is a very rare occurrence, the "Abnormal Loss Stock a/c" may carry a credit balance which indicates that the asset has realised at a value greater than the actual asset value, thereby resulting in a profit. Whether there is a profit or a loss, it is of abnormal nature since it is related to "Abnormal Loss Stock a/c". The profit or loss is transferred to the "Profit & Loss a/c" thereby closing the "Abnormal Loss Stock a/c". When there is a loss
o

Debit Profit & Loss a/c

"Profit & Loss a/c" being a nominal account, any loss should be debited to it. [Profit & Loss a/c Nominal a/c Debit all expenses and losses.]
o

Credit Abnormal Loss Stock a/c

The "Abnormal Loss Stock a/c" has a debit balance and has to be closed by transferring the balance to the "Profit & Loss a/c". Thus the "Abnormal Loss Stock a/c" has ["Abnormal Loss Stock a/c" Real a/c Credit what goes out.] to be credited.

The "Abnormal Loss Stock a/c" carries a debit balance when there is a loss. Transfer of a debit balance from one account to a second results in the second account being debited and the first account being credited. Journal in the books of M/s __ for the period from ____ to _____ Date Dec 31st V/R No. Particulars Profit & Loss a/c To Abnormal Loss Stock a/c [For the net loss in abnormal loss stock being transferred to the profit and loss account.] Dr Date Particulars Abnormal Loss Stock a/c J/F Amount Date Particulars Cr J/F Amount Dr L/F Debit Amount (in Rs) 12,200 12,200 Credit Amount (in Rs)

(in Rs) 16/08/05 To Purchases a/c To Cash a/c To Bank a/c To Exp. Payable 24,000 31/12/05 By Cash 1,000 By Bank 2,800 By Pro. Rec 1,200 By Bank By Ins. Rec By P/L a/c 29,000

(in Rs) 4,000 2,400 2,900 5,000 2,500 12,200 29,000

When there is a gain

o

Credit Profit & Loss a/c

"Profit & Loss a/c" being a nominal account, any profit should be credited to it. [Profit & Loss a/c Nominal a/c Credit all incomes and gains.]
o

Debit Abnormal Loss Stock a/c

The "Abnormal Loss Stock a/c" has a credit balance and has to be closed by transferring the balance to the "Profit & Loss a/c". Thus the "Abnormal Loss Stock a/c" has to be debited. The "Abnormal Loss Stock a/c" carries a credit balance when there is a profit. Transfer of a credit balance from one account to a second results in the second account being credited and the first account being debited. Journal in the books of M/s __ for the period from ____ to _____ Date Dec 31st V/R No. Particulars Abnormal Loss Stock a/c To Profit & Loss a/c [For the gain in the abnormal loss stock account transferred to the profit and loss account.] Dr Date Particulars Abnormal Loss Stock a/c J/F Amount (in Rs) Date Particulars J/F Cr Amount (in Rs) 4,000 2,400 Dr L/F Debit Amount (in Rs) 2,800 2,800 Credit Amount (in Rs)

16/08/05 To Purchases a/c To Cash a/c

24,000 31/12/05 By Cash 1,000 By Bank

To Bank a/c To Exp. Payable To P/L a/c

2,800 1,200 2,800 31,800

By Pro. Rec By Bank By Ins. Rec

2,900 20,000 2,500 31,800

Assume that the insurance realisation is Rs. 20,000 in place of Rs. 5,000 for understanding this. Adjustment during Final Accounting Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded. Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e. towards the end of the accounting period. Regular Entries 1) Abnormal Loss Stock a/c Dr To Trading a/c 2) Abnormal Loss Stock a/c Dr To Expenses Outstanding a/c 3) Insurance Company a/c Dr To Abnormal Loss Stock a/c 4) Proceeds Receivable a/c Dr To Abnormal Loss Stock a/c 5) Profit and Loss a/c Dr To Abnormal Loss Stock a/c Note Since adjustment is needed at the end of the accounting period, we assume that the proceeds are receivable, expenses are payable and insurance amount is receivable where the information relating to them is to be incorporated into the accounts. The net effect would give an understanding on where the amounts are to be adjusted. Since the journal entry representing the net effect is a compound entry, the number of accounts affected, thereby the Net Effect

Insurance Company a/c Dr Proceeds Receivable a/c Dr Profit and Loss a/c Dr To Trading a/c To Expenses Outstanding a/c

number of adjustments to be made , can be identified by the number of accounts involved in the compound entry. The value of stock used in the building up of the asset is to be 1. The value of stock lost should be credited to the "Trading a/c" 2. The net profit or loss on disposing the abnormal loss stock should be transferred to the "Profit & Loss a/c" o Where there is no realisation either in the form of sale proceeds of salvaged stock or insurance realisation, the total value of stock lost (value of stock + expenses incurred) would be a loss. o Where there is sale or insurance realisation or both the total value realised is reduced by the total amount of realisation giving us the net amount of loss. o Where there is sale or insurance realisation or both, if the total value realised is more than the total value of the stock there would be a gain. [This is a very rare occurrence.] Abnormal Loss Stock Statement to ascertain Loss/Gain Hide/Show Particulars Incomes/Realisations: Sale Realisation Cash Bank Receivable Insurance Received Receivable Total Realisation Expenses/Costs: Value of Stock Expenses Incurred Paid in Cash Paid by Cheque Outstanding Commission on Sale Total Cost/Value of the Abnormal Loss Stock Profit(+)/Loss() [Sale Realisation Total Cost/Value] Amount Amount

4,000 2,400 2,900 5,000 2,500

9,300

7,500 16,800 24,000

1,000 2,800 1,200

5,000 29,000 12,200

3. The amount of expense payable outstanding if any relating to the abnormal loss stock has to be shown as a liability on the liabilities side of the balance sheet. 4. The amount of sale proceeds receivable if any relating to the abnormal loss stock has to be shown as an asset on the assets side of the balance sheet.

5. The insurance amount receivable if any relating to the abnormal loss stock has to be shown as an asset on the assets side of the balance sheet. Dr Particulars Amount (in Rs) Trading and Profit & Loss a/c Amount (in Rs) Particulars Amount (in Rs) Cr Amount (in Rs) 24,000

By Abnormal Loss

To Abnormal Loss Stock

12,200

Balance Sheet of M/s ______ as on 30th June 2006 Liabilities Amount Amount Assets Realisation Receivable Expenditure Outstanding 1,200 Insurance Company 2,500 Amount Amount 2,900

Using Temporary Accounts Recording the value of stock lost on account of abnormal reasons would result in the "Abnormal Loss Stock a/c" or an account by any relevant name being created. The "Abnormal Loss Stock a/c" would be used in recording the transactions relating to expenses on the stock, sale realisations, insurance realisation etc., if the entries are being recorded subsequent to recording this transaction. However, where the journal entry for recording the value of abnormal loss stock has not yet been recorded, the "Abnormal Loss Stock a/c" would not be found in the books of accounts. In such cases, where the accountant is confused about which account to use some temporary account by relevant name would be used to complete recording the transaction. In such cases, care should be taken to ensure that these temporary accounts are cleared by using them in recording the entries relating to abnormal loss stock. These can be identified by their presence in the "Trial Balance".

For Expenses Paid

When expenses are paid, a temporary account, say by name "Expenses on Abnormal Loss Stock a/c" may be used to record the expenditure incurred. If such an account is used, it would appear in the "Trial Balance". This has to be closed by absorbing the expenditure to the "Abnormal Loss Stock a/c". Journal Hide/Show

For Sale Realisation When sale proceeds are received, a temporary account, say by name "Sale of Abnormal Loss Stock a/c" may be used to record the proceeds received/receivable. If such an account is used, it would appear in the "Trial Balance". This has to be closed by absorbing the proceeds to the "Abnormal Loss Stock a/c". Journal Hide/Show Journal in the books of M/s __ for the period from ____ to _____ Date Dec 31st V/R No. Particulars Cash/Bank/Proc. Rec a/c To Sale of Abnormal Loss Stock a/c [For the amount received on the sale of abnormal loss stock.] Trial Balance of _____ as on 31st December 2005 Debit Amount (in Rs) Credit Amount (in Rs) Dr L/F Debit Amount (in Rs) 8,000 8,000 Credit Amount (in Rs)

Particulars

L/F

Sale of Abnormal Loss Stock

8,000

Total

Journal in the books of M/s __ for the period from ____ to _____ Date Dec 31st V/R No. Particulars Sale of Abnormal Loss Stock a/c To Abnormal Loss Stock a/c [For the sale realisation of abnormal loss stock absorbed.] Dr Date Particulars Sale of Abnormal Loss Stock a/c J/F Amount (in Rs) Date Particulars By Cash/Bank/Drs J/F Cr Amount (in Rs) 8,000 8,000 Dr L/F Debit Amount (in Rs) 8,000 8,000 Credit Amount (in Rs)

31/12/05 To Abnormal Loss Stock a/c

8,000 1st 31st 8,000

Dr Date Particulars

Abnormal Loss Stock a/c J/F Amount (in Rs) 24,000 31/12/05 By Sale of Ab. ls. St Date Particulars J/F

Cr Amount (in Rs) 8,000

31/12/05 To Trading a/c

For the purpose of incorporating the same information as adjustment, the temporary account is assumed to have got exhausted and the proceeds are considered for ascertaining the profit or loss on abnormal loss stock.

For Insurance Realisation When insurance realisation is received, a temporary account, say by name "Insurance received a/c" may be used to record the amount received/receivable. If such an account is used, it would appear in the "Trial Balance". This has to be closed by absorbing the proceeds to the "Abnormal Loss Stock a/c". Journal Hide/Show

Journal in the books of M/s __ for the period from ____ to _____ Date V/R Particulars No. Cash/Bank To Insurance Received a/c a/c Dr Debit L/F Amount (in Rs) 5,000 5,000 Credit Amount (in Rs)

Dec 31st

[For the amount received towards compensation for loss of stock from the insurance company.] Trial Balance of _____ as on 31st December 2005 Debit L/F Amount (in Rs) Credit Amount (in Rs)

Particulars

Insurance Received

5,000

Total Journal in the books of M/s __ for the period from ____ to _____ Date V/R Particulars No. Insurance Received To Abnormal Loss Stock a/c a/c Dr Debit L/F Amount (in Rs) 8,000 8,000 Credit Amount (in Rs)

Dec 31st

[For the insurance realisation of abnormal loss stock absorbed.] Dr Insurance Received a/c Date Particulars J/F Amount (in Rs) 5,000 5,000 Date Particulars J/F Cr Amount (in Rs) 5,000 5,000

31/12/05 To Abnormal Loss Stock a/c

1st - By Cash/Bank 31st

Dr Abnormal Loss Stock a/c

Cr

Date

Particulars

J/F

Amount (in Rs) 24,000

Date

Particulars

J/F

Amount (in Rs) 5,000

31/12/05 To Trading a/c

31/12/05 By Ins. Received

For the purpose of incorporating the same information as adjustment, the temporary account is assumed to have got exhausted and the proceeds are considered for ascertaining the profit or loss on abnormal loss stock.