Accounting for Consignment

Due to increasing size of market, it is quite obvious that manufacturers or

whole sellers cannot approach directly to every customer around the state or
nation. To overcome this limitation, manufacturers normally appoint reliable
agents at every desired location to reach the customers directly. He makes
an agreement with local traders who can sell goods on his behalf on
commission basis.

Meaning and Features of Consignment

Consignment is a process under which the owner consigns/handovers his
materials to his agent/salesman for the purpose of shipping, transfer, sale
etc.

Following are the points that throw more light on the nature and scope of a
consignment −

 Here, ultimate ownership of the goods remains with the manufacturer or whole
seller who handovers goods to his agent for sale on commission basis.
Consignment is merely a transfer of possession of goods not an ownership.

 Since ownership of goods remain with the manufacturer (consignor), consignee

(agent) is not responsible for any loss or destruction of goods.

 The goods are sold on owner’s risk and hence, profit/loss goes to owner.

 Consignee only gets re-imbursement of expenses incurred by him and commission

on sale made by him, because sale that proceeds, belongs to owner (consignor).

Why is Consignment not a Sale?

Following are the reasons that explain why consignment is not a sale −

 Ownership − Ownership of goods need to be transferred from seller to buyer in

case of sale, but ownership of goods remains with the consignor, till the goods
are sold by the consignee.

 Risk − In case of a consignment, normally, risk remains with the consignor in the
event of goods being lost or destroyed.
  Relationship − The relation between a seller and a buyer will be of debtor and
creditor in case where goods are sold on credit basis. On the other hand, the
relationship between a consignor and a consignee is that of principal and agent.

 Goods Return − Usually, the sold goods cannot be returned back; however, if
there is any manufacturing defect or any other technical fault, seller is obliged to
take them back. On the other hand, consignee may return the unsold stock of
goods to consignor anytime.

Important Terms
Pro-forma Invoice
Invoice implies that the sale has taken place, but pro-forma invoice is not an
invoice. Proforma invoice is a statement prepared by the consignor of goods
showing quantity, quality, and price of the goods. Such pro-forma invoice is
issued by the consignor to consignee regarding the goods before the sale
actually takes place.

Account Sale
Statement showing the details of goods received, goods sold, expenses
incurred, commission charged, remittances made, and due balance is called
Account Sale and it is remitted by the consignee to the consignor of goods on
a periodic basis.

Commission
There are three types of commission payable to consignee on sale of the
goods −

 Simple Commission − This is usually a fixed percentage on the total sale,

calculated as per mutually agreed terms.

 Over-riding Commission − In case of an extra-ordinary sale of the goods, some

specific amount is payable to consignee in the form of an incentive is called
overriding commission. Over-riding commission is also calculated on the total
sales.

 Del-credere Commission − “An agreement by which an agent or factor, in

consideration of an additional premium or commission (called a del credere
commission), engages, when he sells goods on credit, to insure, warrant, or
guarantee to his principal the solvency of the purchaser, the engagement of the
 factor being to pay the debt himself if it is not punctually discharged by the buyer
when it becomes due.”

C. & G. Merriam Co.

A del credere commission is paid by the consignor to his agent for taking
additional risk of recovery of debts from the consignee on an account of credit
sales made by him (agent) on consignor's behalf.

Direct Expenses
Expenses, which increases the cost of the goods and are of non-recurring
nature and incurred till the goods reach the warehouse of consignee may
called direct expenses.

Indirect Expenses
Warehouse rent, storage charges, advertisement expenses, salaries, etc.
comes under the category of the indirect expenses. The distinctions between
direct and indirect expenses are important especially at the time of valuation
of the unsold closing stock.

Advance
Amount paid in advance by a consignee to consigner as security called as
advance.

Valuation of unsold Consignment

Valuation of unsold stock will be done like a closing stock of a Trading concern
and should be valued at the cost or the market price whichever is low. This
stock will be valued at −

 Proportionate cost price and

 Proportionate direct expenses.

Here, proportionate direct expenses mean — all expenses incurred by the

consignor and the expenses of consignee, which are incurred by him till the
goods reach the warehouse.

Invoicing Goods higher than Cost

Under this method, goods are charged at the cost + profit and the pro-forma
invoice also shows this higher price of such goods. To know the actual profit,
at the end of an accounting period, consignment account will be credited with
excess price so charged. Value of the stock will also be adjusted to the extent
of profit element. Main reason to adopt this policy by consignor is −

 To hide actual profit from consignee.

 Valuation of a stock at the consignor’s warehouse is comparatively easy in this

case.

 In this case, consignor usually directs consignee to sale goods on invoice price
only. It prevents different sale price to different customers.

Loss of Goods
There may be two types of losses as explained below −

Normal Loss − Normal loss may occur due to inherent characteristics of

goods like evaporation, drying up of goods, etc. It is not separately shown in
the consignment account, but included in the cost of goods sold and the
closing stock by inflating the rate per unit. To calculate the value of unsold
stock, following formula is used.
Valueofclosingstock=TotalvalueofgoodssentNetquantityreceivedbyconsignee×UnsoldquantityVa
lueofclosingstock=TotalvalueofgoodssentNetquantityreceivedbyconsignee×Unsoldquantity
Netquantityreceived=Goodsconsignedquantity−NormallossquantityNetquantityreceived=Goodsco
nsignedquantity−Normallossquantity

Abnormal Loss − An abnormal loss may occur due to any accidental reason.
It is credited to the consignment account to calculate actual profitability.
Valuation of closing stock is done on the same basis as explained earlier i.e.
proportionate cost + proportionate direct expenses.

Abnormal Loss and Insurance

If, there is an insurance policy in respect of the consigned goods; following
entries will be passed in the books of a consignor −

Sr.No. In the Books of Consignor In the Books of Consignee

1 Payment of Insurance Premium Consignment A/cDr

To Cash A/c
 (a) If insurance premium is paid Or
by the consignor, then cash will be
To Consignee A/c
credited.
(Being Insurance premium paid)
(b) If Insurance premium is paid
by the consignee, then consignee’s
A/c will be credited.

2 Abnormal Loss A/cDr

At the time of Abnormal Loss To Consignment A/c

(Being Loss Incurred)

3
Insurance Company (Name of the
insurer) A/cDr
Acceptance of Claim by
Insurance Company To Abnormal Loss A/c

(Being claim admitted)

4 Bank A/cDr

On receipt of Claim To Insurance Company A/c

(Being amount of claim received)

5 Profit & Loss A/cDr

To Abnormal Loss A/c

In Case of Loss
(Being amount of Abnormal Loss
transferred)

Summary of Accounting Entries

Following Accounting Entries (Except for Loss) will be done in the books of
consignor and consignee for transactions related to the consignment −

Sr.No. In the Books of Consignor In the Books of Consignee

1
When goods are sent to the
consignee

Consignment A/cDr No need to do any Entry in this

case
To Goods Sent on Consignment A/c

(Being Goods Sent on Consignment)

2 Expenses Incurred by Consignor

Consignment A/cDr

To Cash/Bank A/c Not Applicable

(Being Expenses incurred on

consignment)

3 Advance given by consignee

Consigner A/cDr
Cash/Bank A/cDr
To Bank/Cash A/c
To Consignee’s A/c
(Being Advance amount paid to
(Being advance received from
Consignor)
consignee)

4 Expenses Incurred by Consignee Consigner A/cDr

Consignment A/cDr To Bank/Cash A/c

To Consignee’s A/c (Being Expenses incurred on

(Being Expenses incurred by goods received on

consignee) consignment)

5 Sale by Consignee Cash (for cash sale) A/cDr

Consignee’s A/cDr Debtors (for Credit Sale) A/c Dr

To Consignment A/c To Consignor A/c

(Being goods sold)

 (Being Expenses incurred by
consignee)

6 Commission to Consignee

Consignment A/cDr Consigner A/cDr

To Consignee’s A/c To Commission A/c

(Being Commission on sale due to (Being Commission earned)

consignee)

7 Remittance from Consignee

Consigner A/cDr
Cash/Bank A/cDr
To Bank/Cash A/c
To Consignee’s A/c
(Being Balance due Payment
(Being due amount received from made to consignor)
consignee)

8 Entry for Profit on Consignment

Profit & Loss A/cDr

Not Applicable
To Consignment A/c

(Being Profit earned on consignment)

9 Loss on Consignment

Consignment A/cDr

To Profit & Loss A/c

Not Applicable
(Being Loss incurred on Consignment
transferred to the profit & Loss
Account)

Note − The goods sent on consignment account will be closed by transferring

balance into the Purchase account or the Trading account.