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Losses and its Valuation

On the basis of their nature, losses are classified as normal and abnormal losses. Let’s understand each of them individually:

Normal loss

Normal loss is a loss which occurs because of the inherent nature of the product. In other words, those losses whose occurrence is inevitable i.e. which occur on account of normal reasons are normal losses.

 

Example: Losses due to evaporation, normal leakage, shrinkage etc.

 

Note:

  • We do not pass any journal entry to record normal loss.
  • It is automatically recorded by increase in per unit price of the product
  • Normal loss should always be adjusted before valuation of abnormal loss / closing stock


Illustration 3

 

1000 Kgs of Apples are consigned to a wholesaler, the cost being ₹ 3 per Kg plus ₹ 400 of freight; it is known that a loss of 15 % is unavoidable. The cost per Kg will be:


Solution

 

Total cost of apples sent (1,000 X 3) = ₹ 3,000.

Freight incurred = ₹ 400.

Total cost of the consignment (3,000 +400) = ₹ 3,400.

Normal loss (15 % of 1000) = ₹ 150

Normal loss has to be adjusted only from the quantity of goods and not from the value of goods, hence remaining units (1000 -150) 850 shall be valued at ₹ 3,400. This results in Inflation of cost per unit of good units.

Hence, cost per unit = ₹ 3,400/850 units = ₹ 4 per unit

Abnormal loss

Abnormal loss is a loss which does not happen because of the inherent nature of the product. In other words, those losses whose occurrence can be avoided i.e., which occur on account of abnormal reasons are abnormal losses.
 

Example: Losses due to theft, fire, accident etc.

 

Note:

  • Normal loss is generally non-insurable as the same cannot be avoided, whereas abnormal losses can be insured.
  • We need to pass a separate journal entry to record abnormal loss
  • The valuation of abnormal loss depends upon the time and place where such loss occurs





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