Abnormal loss is referred to as the loss that is faced by a company which is beyond the normal loss threshold. In other words, it is a loss that is experienced by a company and is beyond the normal loss that is expected to happen.
Companies suffering from abnormal loss have the situation that the total revenue earned is not sufficient to cover the total losses incurred. If the company experiences a similar loss situation for sustained periods, it will result in serious consequences and threaten the survival of the company.
Causes of Abnormal Loss
Abnormal loss arises due to certain conditions like theft of goods, damage to goods due to substandard material, faulty equipment or natural calamities like fire, earthquake, floods, etc.
From an accounting viewpoint, abnormal loss is said to be the loss that has occurred over and above the normal loss and is detrimental to the business.
These causes should be identified and resolved as early as possible so that the company can minimise the damage and the associated losses.
Abnormal loss can also be a result of the negligence, inefficiency and the substandard working conditions of the business, it can also be due to the use of cheap material, unskilled labour, etc.
Accounting for Abnormal Loss
Abnormal loss causes monetary loss for the business and therefore be classified as an expense and presented in the profit and loss statement.
The losses that occur are separated from the process costs. The process account gets credited by an Abnormal Loss Account with accounting for cost of material, labour and overheads.
Following are the journal entries
Abnormal Loss A/c Dr.
To Process A/c
Cost Ledger Control A/c Dr.
Costing Profit and Loss A/c Dr.
To Abnormal Loss
This concludes the topic of Abnormal Loss, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S