Financial Statement - Research Paper Example

DOCUMENT THAT A BUSINESS MIGHT USE TO ACCOUNT FOR LOSSES, DAMAGED GOODS, AND STOLEN INVENTORY & Section Number of ’s Name: Date: It might be possible that an organization goes for losses, have damaged goods and faces stolen of inventory. It requires a strong internal control system to minimize and control. If the organization faces losses, damaged goods and stolen inventory some accounting steps to be followed as, 1. Losses: if the organizations goes for losses it will be write off in the income statement after valuation and should contact to the insurance company for insurance recovery. 2. Damaged Goods: if the organization has damaged goods, these goods will be evaluated and scrap should be sold to recover some amount and contacted to the insurance company for insurance recovery and write off the loss from the damages. 3. Stolen Inventory: if the organization faces loss from stolen inventory it should be reported for recovery but if after a period unable to found stolen goods it should be treated as loss.

Explanation Losses may be normal or abnormal faced by the organization and there is different accounting treatment for each type of loss. If a company is having normal cost then it will have no special treatment it will only increase the production cost and normal loss is unavoidable and inherent which is valued with the closing stock. If the inventory is decreased by sales it will be treated as an expense in the form of a reduction in inventory (Smith and Butters, 1949). But if abnormal loss is faced by the company it will be valued and Debit to the abnormal loss account and credit to process account.

These kinds of losses may arise from accidents and carelessness. For recording of this loss another account will be created in the chart of accounts and it will be debited and after that it will be write-off as an expense in the income statement. If the company goes for damaged inventory and goods it is same like that of the losses we have discussed but in damages the complete product will not be lost only a portion of the product or asset will be lost. So for this insurance will be claimed from the insurance company and scrap of the goods will be sold to recover some of the amount and after that we can use this amount for the replacement of goods or asset.

For recording of the damages and the recovery from damaged goods we will Debit (Dr) Abnormal Loss and also Debit (Dr) Insurance Receivables and Credit (Cr) Purchase or Merchandise Inventory. And we will record another transaction of scrap sales as, Debit (Dr) Cash and Credit (Cr) Abnormal Loss account. These damages and losses are unpredictable and unexpected that is why they gives more loss and needs special treatment. The case of stolen goods and inventory is not different from the damaged goods but the only difference is that there is no scrap of the goods to be sold for recovery.

Only insurance can be claimed and we can also use the insurance amount recovered for the replacement of that stolen inventory or asset. We may create another account for stolen goods instead of using the same account of abnormal loss. We will treat it same like damages to recording in books of accounts but recovery from scrap will not be recorded. Before going to write-off this loss from stolen goods we will try to recovery the original goods but it is hard to recover so after a specific time and struggle to recover theses goods we will write-off this loss in the income statement.

REFERENCES Smith, D. T. and Butters, J. K., (1949), “Taxable and Business Income”.