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
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Consignment
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Sale
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a)
Ownership
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Ownership remains which the principal.
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Ownership passes to the buyer.
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b)
Relationship
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The relations are of principal and agent, and continue till terminated
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The relations terminated as soon as the goods are delivered and
payment is made.
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c)
Account sales
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It is prepared by consignee.
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No such statement is prepared.
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d)
Loss of goods
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The risk is of consignor.
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The risk is of buyer after sale.
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e)
Return of goods
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Can be returned by consignee at any time.
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Buyer cannot return the goods unless otherwise agreed.
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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)
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Xxxxxxxxx
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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
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Xxxxxxxxx
xxxxxxxxx
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Xxxxxxxx
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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)
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For goods sent on consignment
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Consignment account
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(With the cost of goods)
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To Goods sent on consignment
account
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(2)
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For payment of expenses by the consignor
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Consignment account
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(With the amount spent as expenses)
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To Bank/Cash
account
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(3)
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For advance or Security against goods sent
received from consignee
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Cash or Bank or bills receivable account
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(With the amount cash or bill)
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To Consignee's
personal account
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(4)
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For maturity of Bills receivable
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Cash or Bank account
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(With the amount cash or bill)
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To Bills Receivable
account
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(5)
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For sale of goods by Consignee as per
account sale
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Consignee's personal account
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(With gross proceeds of sales)
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To Consignment account
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(6)
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For expenses incurred by the consignee as
per account sale
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Consignment account
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(With the amount of expenses)
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To Consignee's
personal account
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(7)
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For commission payable to the consignee:-
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Consignment account
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(With the amount of expenses)
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To Consignee's
personal account
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(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:
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Consignment account
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To profit and loss
account
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In
case of loss the entry is:
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Profit and loss account
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To Consignment account
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(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
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(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:
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Stock on consignment account
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To Consignment account
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Accounting
Entries in the Books of Consignee:
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(1)
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When consignment goods are received:-
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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.
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(2)
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For expenses incurred by the consignee:-
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Consignor's personal account
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To Cash account
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(3)
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When advance is given:-
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Consignor's personal account
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To Cash or bills payable
account
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(4)
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When goods are sold:-
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Cash or bank account
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To Consignor's personal
account
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(5)
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For commission due:-
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Consignor's personal account
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To commission account
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