How is abnormal loss treated in profits under the average profit method?

Correct answer: Added back to profit

The direct answer is A: abnormal loss is added back to profit when calculating average profit. Average profit is meant to show normal, recurring earning capacity. An abnormal loss is unusual and does not represent ordinary performance. If it reduced a year’s reported profit, we reverse its effect by adding it back before finding the average. For example, if profit after an abnormal loss is ₹40,000 and the loss is ₹10,000, the adjusted profit is ₹50,000. Option A is correct. Option B deducts the loss twice, which unfairly lowers normal profit. Option C is wrong because the loss cannot simply be ignored; its effect must be corrected. Option D concerns goodwill treatment, not the calculation of average profit. Remember: abnormal expense or loss is generally added back; abnormal income is deducted.