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In Abnormal Gain/Loss account,
For example we have loss so we will debit Abnormal Loss account and Credit Process account. However, why we credit Abnormal Loss account with the Scarp account with SAME units of Abnormal loss? I am pretty clear why we credit that because we want to less our expense but why with the SAME UNITS?
Please help.Let’s say the normal loss rate is 10%.
1,000 units are input and 850 are output.
Therefore, expected output – actual output = 900 – 850 = 50 abnormal loss.
These can be sold for scrap at whatever the scrap price is, say $S.
Therefore the cost of the abnormal loss can be reduced by the amount of scrap proceeds recovered: 50 x $S.
For example sir, we have actual output of 860 units. While input of 1000 units costing $4500 with normal loss of 10%.
Scrap value is $0.90.
Revised value per unit becomes $4.9.
We debit scarp account with
Abnormal Loss of 40 units (0.9 each) so $36 and debit it with normal loss too which is of 100 units so $90. We will credit Scrap account with cash received which is $0.9 per 100 units so $90. Why debit is not equal to credit?
Debit in Scarp Account = 90+36
Credit in Scrap Account = 90
Which thing I am missing sir?Expected output = 900
Cost per unit = (4500 – 100 x 0.9)/900 = 4.9Abnormal loss = 40 units (900 – 860).
Abnormal losses are costed in the same way as good units ie 4.90/unit. Think of an abnormal loss as a good unit in terms of its costs, but it has a scratch on it and has to be scrapped.
The 40 units abnormally lost cost 40 x 4.9 = 196 to make.
They can be sold for 40 x 0.9 = 36
Net cost of the abnormal loss = 196 – 36 = 160.
Scrap account can be handled as follows:
Normal loss:
Dr Cash 100 x 0.90 = 90
Cr Process account 90Abnormal loss:
Dr Scrap account 196 (cost of making)
Cr Process account 196
Dr Cash = 40 x 0.9 = 36
Cr Scrap account 36Net balance on scrap account = 160, to be written off.
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