What is loading? How do you compute it? Give examples.

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.

Leave a Comment

Your email address will not be published. Required fields are marked *

Disabled !