Introduction
In accounting, particularly in consignment and branch accounts, the term “loading” refers to the difference between the cost price and the invoice price (or selling price) of goods. It represents the profit margin or markup added to the cost by the consignor or head office. Understanding and computing loading is crucial for accurate accounting and elimination of unrealized profits in financial statements.
Main Body
Definition of Loading
Loading is the excess amount charged over the cost of goods when goods are invoiced to a branch or consignment at a price higher than the cost. It helps in tracking the profit element in stock and calculating the actual profit earned.
Formula:Loading = Invoice Price - Cost Price
Purpose of Using Loading
- To keep selling prices confidential between consignor and consignee
- To facilitate easy calculation of profit margins
- To prevent manipulation by agents or branch managers
- To track unrealized profits in unsold stock
Computation of Loading
Suppose goods costing Rs. 10,000 are invoiced at Rs. 12,000. Then:
- Loading = 12,000 – 10,000 = Rs. 2,000
- Percentage loading = (2,000 / 10,000) × 100 = 20%
Example 1:
If invoice price = Rs. 24,000 and cost price = Rs. 20,000
- Loading = 24,000 – 20,000 = Rs. 4,000
Example 2:
If goods are loaded with a markup of 25% on cost:
- Cost Price = Rs. 10,000
- Loading = 25% of 10,000 = Rs. 2,500
- Invoice Price = 10,000 + 2,500 = Rs. 12,500
Journal Entry for Removing Loading (in consignment accounting)
If closing stock includes Rs. 1,000 as loading, the entry to remove it would be:
Consignment Stock Reserve A/c Dr. 1,000
To Consignment A/c 1,000
Use in Branch Accounting
When goods are sent to branches at invoice price, the head office must adjust for loading to arrive at actual profit. For example:
- Goods sent to branch (Invoice Price): Rs. 50,000
- Cost Price: Rs. 40,000
- Loading = Rs. 10,000
Adjustments are made in branch adjustment accounts to remove this loading from closing stock and other related accounts.
Conclusion
Loading helps in maintaining internal control and confidentiality in transactions involving branches or consignees. However, it is essential to compute and adjust it properly to reflect true profit or loss in the financial statements. Understanding loading ensures transparency and prevents overstating profits due to unsold stock containing unrealized gains.