Consignment Account

Consignment:

Business organisation sometimes sale their goods through agents as an alternative to selling goods themselves. Consignment is a kind of business expansion without opening a branch in a new potential market. In Consignment, a manufacturer or wholesaler dispatches goods to an agent who has a better knowledge of the local market, for the purpose of sale.

The person sending the goods is called the consignor and the agent who receives the goods is called the consignee. The Consignee markets the product and receives commission at a stipulated rate on the total sales. He is also entitled to recover such expenses which he incurs in connection with the consignment.

The following features of consignment are:

a)      The goods consigned to agent remain the property of the principal so far as these are not sold by the agent. In other words, ownership of the goods consigned is not transferred to the agent.

b)      The agent is to sell goods on account and risk of principal.

c)       All expenses incurred by the agent on goods consigned to him are to be paid by the principal.

d)      The agent is expected to take reasonable care of the goods consigned to him.

e)      The agent is not liable to make the payment of the goods until these are sold.

Consignment accounts:

In accounting, the term “Consignment account” relates to accounts dealing with a situation where on person (consignor) sends goods to another person (consignee) on the basis that the goods will be sold on behalf of and at the risk of the former. Consignment accounts are the accounts recording the transactions relating to the goods sent on consignment.

A consignment account is prepared by the consignor of goods sent to be consignee. All transactions such as cost of goods supplied, expenses incurred by consignor or consignee, consignee’s commission, sales unsold stock, profit or loss on consignment are to be recorded through this account. This account presents a summary of the transactions that have taken place consignor and the consignee. The consignment account reveals profit or loss on consignment and is thus a mini trading and profit and loss account. Consignment account is a nominal account.

Therefore, the following items are debited to this account:-

a)      Cost of goods sent on consignment;

b)      Expenses incurred by the consignor;

c)       Expenses incurred by the Consignee;

d)      Consignee’s Commission;

e)      Bad debts when Del-Credere Commission is not paid, and

f)       Profit on Consignment,

The following items are credited to the consignment account:

a)      Sales proceeds,

b)      Returns of goods by consignee,

c)       Abnormal loss of goods,

d)      Unsold stock with the consignee; and

e)      Loss on consignment (if any)

Important points that should be noted while preparing consignment account:

Consignor: The party which sends the goods also called Principal.

Consignee: The party to whom goods are sent also called Agent.

Ownership: The ownership of the goods sent on consignment remains with the consignor. On sale, the buyer becomes the owner.

Proforma invoice: The consignor does not send invoice to the agent. He sends only a proforma invoice which conveys information to the agent regarding particulars of the goods sent.

Recovery of Consignee expenses: The agent can recover from the principal all expenses incurred by him on the consignment subject to agreement between both agent and principal.

Advance from consignee: It is adjusted against the sale proceeds of the goods.

Accounts sales: It is prepared by the consignee. It shows sales made by him, expenses incurred, commission earned and balance due to consignor.

Difference between Consignment and Sale

Basis	Consignment	Sale
a)      Ownership	Ownership remains which the principal.	Ownership passes to the buyer.
b)      Relationship	The relations are of principal and agent, and continue till terminated	The relations terminated as soon as the goods are delivered and payment is made.
c)       Account sales	It is prepared by consignee.	No such statement is prepared.
d)      Loss of goods	The risk is of consignor.	The risk is of buyer after sale.
e)      Return of goods	Can be returned by consignee at any time.	Buyer cannot return the goods unless otherwise agreed.

Valuation of Unsold Stock

Usually, at the time of closing of the books some of the goods remain unsold. For correct accounting it is necessary that such unsold stock should be valued properly. The general principal of valuing stock on the basis of cost of market price, whichever is lower applies in this cost also. However, the meaning of cost should be properly considered. If the expected selling price of stock on hand is lower than the cost the value put on the stock should be net expected selling price only, i.e. expected selling price less delivery expenses,etc.

In addition to the purchase price, those expenses which are necessary to put the goods in their present place and condition must also be taken into account. Usually all expenses till the goods are placed in the consignee’s Godown are treated as part of cost. Instances of such expenses are freight, insurance in transit, customs duty, Octroi duty, Cartage, etc to the godown of the consignee.

Expenses incurred after the goods reach the consignee’s godown, such as rent and insurance for the godown, interest, etc, do not add to the value of goods. Such expenses, therefore, are not considered while valuing stock. The journal entry for unsold stock is:

            

Stock on Consignment A/c……Dr

                                       To Consignment Account

Calculation of Unsold Stock

Cost of unsold stock Add: Proportionate expenses of consignor  (all expenses/net goods sent on consignment*unsold stock) Add: Proportionate expenses of consignee (all expenses incurred by consignee till the goods reach his premises*unsold stock/goods received by him)

Xxxxxxxxx xxxxxxxxx xxxxxxxxx

Treatment of Normal and Abnormal loss

Normal loss: Losses which are arises due to nature of goods and which cannot be avoided is called normal loss. Such loss would be spread over the entire consignment while valuing stock. The total cost of material and expenses incurred should be dividend the net quantity (Total quantity – normal loss) to ascertain the cost per unit.

Abnormal loss: Losses which are accidental in nature or which can be avoided are called abnormal loss. Value of abnormal loss must be deducted from total cost to find out actual and comparative profit.

Calculation of value abnormal loss

It is calculated in the same way as value of unsold stock which is stated below:

Cost of abnormal loss (net expected selling price if it is less than the cost price) Add: Proportionate expenses of consignor  (all expenses/net goods sent on consignment*abnormal loss) Add: Proportionate expenses of consignee (all expenses incurred by consignee till the goods reach his premises*abnormal loss/goods received by him) Value of abnormal loss Less: Insurance claim Net abnormal loss

Xxxxxxxxx xxxxxxxxx xxxxxxxxx xxxxxxxxx ------------ Xxxxxxxx

1.       Amount of abnormal loss credited to Consignment account.

2.       Insurance claim is credited to abnormal loss account.

3.       Balance of abnormal loss transferred to profit and loss account.

Types of commission paid by the consignor to consignee

Ordinary or Normal Commission: It is based on fixed percentage of gross sales proceeds made by consignee irrespective of cash or credit sale.

Del – Credere commission: Such commission gives protection to the consignor against bad debts. If such commission provided, then loss arises due to bad debt is to be borne by consignee not by consignor. It is calculated on total sales but if mentioned in question then on credit sale.

Over – riding commission: It is calculated on the difference between total sales and normal sales. It is given by consignor to promote sales at higher rate.

Treatment of Advance given by the Consignee to the Consignor:

If advance payment made by consignee at the time of delivery for the goods consigned, it is adjusted against the amount due by the consignee on account of goods sold.

But if advance payment is made by consignee as security against goods consigned to him, then full amount is not adjusted if goods are not fully sold. Proportionate security in respect of unsold stock is to be carried forward till the respective goods held by the consignee.

Return of goods by the Consignee:

a)      Goods can be return at any point of time.

b)      Goods are returned due to various reasons such as poor quality, destroyed in transit etc.

c)       Such goods are valued at the same price at which it is consigned to them.

d)      Expenses on returning such goods are not taken into consideration while valuing stock as such expenses are not incurred to bring the goods in the saleable condition.

Journal Entries in the Books of Consignor:

(1)	For goods sent on consignment
	Consignment account	(With the cost of goods)
	To Goods sent on consignment account
(2)	For payment of expenses by the consignor
	Consignment account	(With the amount spent as expenses)
	To Bank/Cash account
(3)	For advance or Security against goods sent received from consignee
	Cash or Bank or bills receivable account	(With the amount cash or bill)
	To Consignee's personal account
(4)	For maturity of Bills receivable
	Cash or Bank account	(With the amount cash or bill)
	To Bills Receivable account
(5)	For sale of goods by Consignee as per account sale
	Consignee's personal account	(With gross proceeds of sales)
	To Consignment account
(6)	For expenses incurred by the consignee as per account sale
	Consignment account	(With the amount of expenses)
	To Consignee's personal account
(7)	For commission payable to the consignee:-
	Consignment account	(With the amount of expenses)
	To Consignee's personal account
(8) Assuming that all the goods sent have been sold, the consignment account will show at this stage the actual profit or loss made on it. The same is transferred to profit and loss account. The entry in case of profit is:
	Consignment account
	To profit and loss account
In case of loss the entry is:
	Profit and loss account
	To Consignment account
(9)  The goods sent on consignment account may be closed by a transfer to trading account. Journal entry in this case will be Goods sent on consignment account To Trading account
(10) For Unsold Stock When all the goods sent on consignment have not been sold. the value of unsold goods in the hands of the consignee must be ascertained and the profit or loss should be found out by taking this stock into account. The entry is:
	Stock on consignment account
	To Consignment account
Accounting Entries in the Books of Consignee:
(1)	When consignment goods are received:-
	No entry is made in the books of account. The consignee is not the owner of the goods and therefore he makes no entry when he receives the goods.
(2)	For expenses incurred by the consignee:-
	Consignor's personal account
	To Cash account
(3)	When advance is given:-
	Consignor's personal account
	To Cash or bills payable account
(4)	When goods are sold:-
	Cash or bank account
	To Consignor's personal account
(5)	For commission due:-
	Consignor's personal account
	To commission account