Introduction
In consignment and process costing, losses are unavoidable and must be classified correctly for proper accounting treatment. Losses generally fall into two categories: Normal Loss and Abnormal Loss. Normal Loss arises naturally during handling, processing or storage, whereas Abnormal Loss occurs unexpectedly due to avoidable or accidental reasons. Correct classification ensures accurate valuation of closing stock and true profit determination.
Key Differences between Normal Loss and Abnormal Loss
| Basis | Normal Loss | Abnormal Loss |
|---|---|---|
| 1. Meaning | Loss that is unavoidable and occurs due to the inherent nature of goods. | Loss that is avoidable and occurs due to abnormal factors or mishandling. |
| 2. Causes | Natural causes like evaporation, drying, leakage, weight reduction, breakage. | Accidents, fire, theft, negligence, improper handling. |
| 3. Responsibility | No one is responsible; it is considered normal in business. | Someone is responsible—consignee, employee, or external factor. |
| 4. Treatment in Accounts | Not shown separately; is absorbed into the cost of remaining goods. | Shown separately in accounts as Abnormal Loss Account. |
| 5. Effect on Valuation | Increases cost per unit of remaining stock. | Does not affect cost per unit; valued separately at cost. |
| 6. Insurance Claim | Generally, no insurance claim arises. | Insurance claim may arise depending on the cause. |
| 7. Occurrence | Occurs regularly and expected in normal course of operations. | Occurs rarely and unexpectedly. |
| 8. Example | Evaporation of petrol, drying of fruits, leakage of oil during transit. | Fire destroying stock, theft of goods, damage due to accident. |
Conclusion
Thus, Normal Loss is a part of routine business activity and is absorbed into the cost of remaining goods, whereas Abnormal Loss arises due to unforeseen circumstances and is recorded separately. Correct differentiation ensures proper valuation of inventory and accurate profit reporting in consignment and process accounts.