When goods are received and GRN is made, accountants are made necessary journal entries in the books of accounts for materials receiving. At the same time when materials are issued to the production and other department, accountants give necessary entry. But sometime, due to storage condition, fire or other disaster materials may be scraps, spoilage, defectives and wastes and accountants should pass journal entries for this goods.
In this Article, We would like clear the concept of above issues and will try to solve the accounting problems.
What is Scrap Materials?
Why materials gone into scrap? Materials could be scraped due to break down of machinery, wrong planning, bad production method, inferior material, bad workmanship etc.
According to ICMA (London),” scraps refers to discarded materials from any job or process having some value which is either sold without further treatment or used as raw material for another process.”
Most of the cases, it would be difficult to ascertain the value of the scrap before its actual sale. Here is the list of various alternative treatments of scraps in Cost Accountants:
- Ascertain the value of scraps and credit it to the job from which scraps are occurred.
- Credit the sale proceeds of the scraps from all jobs to production or factory overhead account.
- Sale proceeds of scraps to be credited to ” Miscellaneous Income Account.”
- Debit the value to the job when the scraps using as raw materials and credit the job from which these originated.
Accounting Treatment of Scraps
- When the Scraps are ascertained and identified the Job A/c:
| Scrap Materials A/c | Debit |
| To, Work -in -Progress A/c | Credit |
| (Value of Scrap are credited to job from where they occurred) |
| Bank/Debtors A/c | Debit |
| To, Scrap Materials A/c | Credit |
| ( Being the scrap materials is sold) |
** When identification of the scraps with the job is difficult, Factory Overhead is credited. The Journal entry will be :
| Bank/Debtors A/c | Debit |
| To, Factory Overhead A/c | Credit |
| (Sale proceeds of scraps credited to factory overhead) |
2. When the Scraps are insignificant Sale proceeds of the scraps are credited to Miscellaneous Income A/c which is transferred to Profit & Loss A/c. The Accounting entries are as follows:
| Bank/Debtors A/c | Debit |
| To, Miscellaneous Income A/c | Credit |
| (Sale Proceeds off scraps are recorded and treated as Miscellaneous Income) |
| Miscellaneous Income A/c | Debit |
| To, Profit & Loss A/c | Credit |
| (Transfer to Profit & Loss A/c) |
** Some times scraps of one Job is treated as raw materials of another Job. The accounting entry in this respect:
| Work-in-Progress A/c (Job using the Scraps) A/c | Debit |
| To, Work-in-Progress A/c ( Job giving out the Scraps) A/c | Credit |
| (Transfer of scrap to other job as raw materials) |