CONSIGNMENT ACCOUNTS

2.0 OBJECTIVE

After reading this lesson, you should be able to

a) Understand the meaning of consignment and explain the difference

between consignment and sale

b) Explain the accounting treatment of consignment transactions

c) Account for normal and abnormal losses in consignment

2.1 INTRODUCTION

Now-a-days it is quite common that manufacturers or wholesale

dealers despatch goods to their agents at home and abroad to increase their

sales. The knowledge of the agent of the local conditions where he resides

proves useful in increasing the sales. Moreover it is very expensive for the

manufactures to sell the goods directly either in home market or in foreign

market. Therefore, different agents are appointed for different places.

2.2 MEANING OF CONSIGNMENT

It is common practice with practically all manufacturers or wholesalers

to sell goods through agents both within the country and abroad. The goods

are sent to be kept and sold on behalf of and at the risk of sender by the

recipient. The person who forwards the goods for sale is consignor, the

person to whom goods are forwarded for sale is ‘consignee’ and goods so sent

are called ‘Goods sent on Consignment’. Consignment is a means of facilitating

sale but is not actually a sale. Consignment is different from sales. A

consignment is returnable if goods are not sold but in case of sale, the goods

are not returnable except for special reasons, such as on account of damage

or if below standard goods are supplied. When goods are sold to a person
the property in them passes to that person, but when goods are consigned to

a person the legal ownership of the goods remains with the consignor. Hence

when goods are sold the relationship between two parties is that of a

creditor and debtor but when the goods are consigned relationship between

the consignors and consignee is that of ‘principal’ and ‘an agent’.

2.3 DISTINCTION BETWEEN CONSIGNMENT AND SALE

The following points summarize clearly, the difference between a

consignment and a sale.

2.4 PROCEDURE TO BE FOLLOWED IN CASE OF CONSIGNMENT

When the goods are dispatched by the consignor to the consignee, the

consignor makes out a statement known as ‘preform invoice’ like a regular

invoice giving details about the consignment and price which is normally at

cost, but occasionally it may be at invoice price which is above the cost.

The consignee does not become liable for the payment of amount

named in the invoice, but as matter of advance for goods, he usually makes

payment in advance either by accepting a bill or by remitting a bank draft.

(a) Account Sale : The consignee renders to his consignor regularly a

statement showing sales, expenses incurred, commission charged and

remittance made with the resultant balance due by him. This statement is

known as ‘Accounts Sales’.

On receipt of Account Sales the consignor shall make entries in his

books of account and complete the Consignment account and the Consignee’s

account.

(b) Advance on Consignment : It is common practice for the consignor to

ask the consignee for some deposit as a security for goods sent on

consignment to the consignee. It may be paid by any mode of payment-

cheque, cash or even bills of exchange.

(c) Commission : The consignee usually gets a commission for selling the

goods on behalf of the consignor as a fixed percentage on sales. So more the

sales more will be the commission earned by the consignor. But there are

some other kinds of commission which are sometimes given to the consignee

for extra burden and activities i.e. DelCredre Commission and over-riding

Commission.

(i) DelCredre Commission : Ordinarily the consignee is not responsible to

the consignor for the payment of money by the purchasers but sometime he
undertakes to guarantee payment due for all the goods he sells on credit and

cash whether his customers pay him or not. In consideration of his this

warranting the solvency of the buyers, he is paid an extra commission called

a Del Credre Commission. The consignee will pay the consignor whether he

himself receives payment from debtors or not. The commission is payable on

total proceeds.

(ii) Over-Riding Commission : It is an extra commission in addition to

ordinary commission. This commission is also calculated on sales like ordinary

commission. This commission is generally given by the consignor to the

consignee to enhance the sale or to boost up the sales of a new product.

(d) Proforma Invoice : Since the goods sent on consignment can not be

treated as sales, the consignor does not prepare proper invoice. He simply

prepares a Proforma invoice and sends it to the consignee, alongwith the

goods despatched. This is prepared with a view to inform the consignee

about price of goods, expenses incurred, mode of transportation and the

minimum sale price at which the goods are to be sold.

(e) Expenses : Expenses relating to consignment of goods are divided into

two categories vis. (i) Non-recurring expenses and (ii) Recurring expenses.

Non-Recurring Expenses : All the expenses which are incurred for

bringing goods to the godown of the consignee are non recurring in nature.

Such expenses are generally goods have reached the consignee’s place or

godown.

They are recurring in nature because they may be incurred repeatedly by

the consignor and consignee. The examples of recurring expenses incurred

by the consignor are advertising, discount of bills, commission on collection

of cheques, travelling expenses of salesmen, bad debts etc. The examples of

recurring expenses incurred by the consignee are godown rent; godown

insurance, sales promotion etc.

2.5ACCOUNTING TREATMENT OF CONSIGNMENT TRANSACTIONS

(A) Books of the Consignor : The consignor opens three accounts in his

ledger.

(1) Consignment Account : It is prepared to ascertain profit or loss on each

consignment e.g. Consignment to Bombay Acount. It is not a personal account

but a special Trading and Profit and Loss account or a nominal account. (2)

Consignee’s Account : It is prepared to show the balance due to or from

consignee at a particular date. It is a personal account; and

(3) Goods sent on Consignment Account : It is prepared to show the

amount of goods sent to the consignee. This is real account. The balance is

credited to Purchase or Trading Account.

Journal Entries

1 (a) When the goods are sent on consignment at cost or at invoice price:

Consignment A/c Dr.

 To Goods sent on consignment A/c

(Being goods sent on Consignment at cost)

(b) If goods are sent at invoice price then one more entry is needed

for making the adjustments. The amount of this entry is the

difference between the invoice price and the cost price. The

entry will be:

Goods sent on consignment A/c Dr.

To Consignment A/c

2. When expenses are incurred by the Consignor:

Consignment A/c Dr.

To Bank A/c

(Being expenses incurred)

3. When the Account Sales is received from the Consignee :

(i) Consignee A/c Dr.

To Consignment A/c

(Being the total sales by consignee)

(ii) Consignment A/c Dr.

To Consignee A/c

(Being the expenses incurred by consignee and with his

Commission)

4. When the consignee remits the cash or bills:

Bank A/c/ Cash A/c/Bills receivable A/c Dr.

To Consignee A/c

(Being Cash/B/R received)

5. When bills is discounted with Bank:

Cash A/c/ Bank A/c Dr.

Discount A/c
 To Bills receivable A/c (Being B/R

discounted with the Bank)

6. For Stock remaining unsold:

Consignment stock A/c Dr.

To Consignment A/c

(Being the value of stock plus proportionate expenses)

7. For Abnormal Loss of stock:

General Profit & Loss Account A/c Dr.

(with unrecoverable loss)

Insurance company A/c (with total recoverable loss) Dr.

To Consignment A/c (with total loss)

(For the abnormal loss of stock, amount recoverable and amount not

recoverable)

8. For Profit or loss on Consignment:

(i) If there is profit on Consignment

Consignment A/c Dr.

To general Profit and Loss A/c

(Being the Profit on consignment transferred to Profit and Loss A/c)

(ii) If there is loss on Consignment

General Profit and loss Account Dr.

To Consignment A/c

(Being the loss on Consignment transferred to Profit & Loss Account)

9. For settlement of account with consignee:

Bank/Bills recoverable Dr.

To Consignee A/c

(Being amount sent for final settlement)

 The Goods sent on Consignment Account’ which shows credit balance

will now be transferred to the Trading Account. Then the entry is :

Goods sent on consignment Account Dr.

To Trading A/c

(Being the goods sent on consignment account transferred to trading

account).

Ledgers

a) Consignment Account : Consignor prepares this account in his ledger.

In it all transactions of a consignment are shown. This account

discloses profit or loss incurred by each consignment. Debit side shows

goods sent on consignment expenses incurred by consignor and

consignee, consignees commission, bad debts etc. Credit side shows

total sales (cash and credit), goods returned, and unsold stock etc. The

difference between the debit and credit totals of Consignment

Account is regarded as profit or loss which is transferred to the

Profit and Loss Account and the Consignment Account stands closed.

It is infact a nominal account and is just like Trading and Profit and

Loss Account about which you must have studied earlier in final

accounts. Therefore the principles applied to Trading and Profit and

Loss Account hold good for this account also. Like Trading and Profit

and loss Account all expenses and purchases are debited to this

account and all sales and incomes are credited.

b) Goods sent on consignment Account : This account shows the goods

transferred from the consignor to the consignee and goods returned

 by the consignee to the consignor. All the goods consigned by the

consignor will be credited to this account and the goods returned by

the consignee are debited to this account. The balance represents the

cost of goods with consignee for sale, and is transferred to the

Trading Account.

c) Consignee’s Account : This account discloses what amount is due from

the consignee. The consignee’s account is debited with all cash and is

credited by sales effected by the consignee. The various expenses

incurred by the consignee, the commission charged by him as well as

the advance remitted by him are credited to this account. This

account usually shows a debit balance indicating the amount due from

the consignee. At times it may show credit balance, if the advance

given by the consignee is more than the sale affected by him. The

balance revealed by this account is shown in the balance sheet of the

consignor.

B. Books of the Consignee

Consignee need not pass any entry in his books on the receipt of goods by

him or for expenses incurred by the consignor. He should, in principle, open

the Consignor’s Account in his books and route all the transactions through it

in the following manner:

1. When cash is remitted or bill is accepted

Consignor A/c Dr.

To Cash A/c/Bills payable A/c

(Being cash remitted or bills accepted).

2. When expenses are incurred

Consignor A/c Dr.

 To Cash A/c

(Being expenses incurred on consignment)

3. When sale is made on Consignment (i) For cash sales

Cash a/c Dr.

To Consignor’s A/c

(ii) For credit sales

Debtor’s A/c Dr.

To Consignor A/c

(Being goods sold on credit)

4. On remitting balance to consignor after commission

Consignor’s A/c Dr.

To Cash A/c/Bank A/c

To Commission A/c

(Being cash remitted after commission)

Note : (A)For unsold stock lying with consignee, no entry is to be

passed in his book of account.

(B) Consignee does not pass any entry for profit or loss in his

books.

The consignee also prepares ledger accounts after passing all the

journal entries. The Consignor’s Account and Commission Account are the

two important account prepared by the consignee in his books. Of course he

will also do the postings to the other accounts such as Consignment Debtor’s

Account, Consignment Expenses Account and Bills Payable Account etc.

(a) Consignor’s Personal Account : It is the main account of Consignee’s

books which is prepared for working out the amount due to the consignor.

Whatever amount he receives from sales of goods is credited to this

account. All expenses incurred by the consignor in relation to consignment

the commission due to him and the advance given by him to the consignor will

be debited to this account. Further, if the consignee does not get del credre

commission, the bad debts on account of credit sales are also debited to the

Consignor’s Account. The balance of this account indicates the amount

payable to the consignor. This account is just the opposite of the Consignee’s

Account in the books of the consignor.

(b) Commission Account : It is nominal account. It shows the

income earned by the consignee for the services rendered by him. All types

of commission whether ordinary or special, due to the consignee is credited

to this account. The commission account will be debited with bad debts if

the consignee is to bear such loss because of delcredre commission.To

continue with the same illustration No. 1, the consignee will have the

following journal entries and ledger accounts:

2.6 VALUATION OF STOCK ON CONSIGNMENT

Valuations of unsold stock is usually done at cost. Cost, in case of

consignment stock, would include the cost at which the goods are consigned

plus, the proportionate non-recurring expenses. All the non-recurring

expenses, whether incurred by the consignor or by the consignees, are to be

taken into account. In the absence of details of expenditure incurred by the

consignee, all expenses incurred by him are to be taken as recurring

expenses and thus are not to be considered in the calculation of closing

stock. In other words, while valuing the closing stock we add such

proportionate expenses to the cost price that have been incurred upto the

time the goods are brought to the place of the consignee. Any other

expenses paid by the consignor or the consignee after this point will not be

considered as these expenses do not add to the value of the goods. Such
expenses are godown rent, selling expenses, carriage outwards, godown

insurance, discount etc.

Usually following expenses are added for calculation of closing

stock : Carriage and Freight, Loading Charges, Custom Duty, Clearing

Charges, Dock Dues, Carriage paid upto the Godown, and Unloading charges.

Following are the expenses which are not considered for calculation

of closing stock : Godown rent, Discount, Bad Debts, Insurance of the goods

in the Godown, and Selling and Distribution expenses.

One can notice that all expenses incurred by the consignor are

considered for valuation of the closing stock. The problem arises only

selecting recurring expenses in case of consignee.

The value of unsold stock affects the profit or loss on any

consignment

so its valuation and recording in the books of consignor is very important. It

is shown on the credit side of Consignment Account for which the journal

entry passed would be as :

Stock on Consignment A/c Dr.

To Consignment A/c

(Being the values of sold stock)

On the other hand the Consignee, will not pass any entry for the

closing stock. It is because he is not the owner of the goods and does not

pass any entry even when the goods are received or he returns the goods.

2.7 ACCOUNTING FOR LOSS OF GOODS

Goods sent on consignment may be lost or damaged in transit. The

loss of goods may be either (i) normal or (ii) abnormal Treatment in the

books of accounts will depend upon the nature of loss.

Normal Loss : Loss of goods is sold to be normal when it is natural,

unavoidable and is due to inherent characteristic of the goods despatched

like evaporation, sublimation etc. The amount of stock to be carried down is

the proportion of the total cost that the number of units on hand bears to

be the total number units as diminished by loss.

Deficiency of Stock : When there is deficiency of stock at the time of

stocktaking and the consignee is under a liability to account for the missing

stock, the entry will be:

Consignee Dr.

To Consignment a/c

(Being the deficiency of stock charged to the consignee).

If, on the other hand, he is not liable, the stock of the consignment

will be shown at the gross figure and the consignment account will be

debited with the loss in stock.

Abnormal Loss : There are the losses which are accidental and not natural

like theft. Abnormal loss may occur in the godown of the consignee or in

transit. Let us see the effect of abnormal loss on the closing stock under

both situations.

When the abnormal loss occurs in the godown of the consignee the

valuation of closing stock is not effected because the expenses incurred

after they reach the godown of the consignee are not to be taken into

account for the purpose. Hence, the normal formula will be followed for the

valuation of closing stock. Look at illustration 4 and see how the abnormal
loss and the value of closing stock is calculated when the abnormal loss

occurs in the godown of the consignee.

The treatment in accounts will depend upon whether the unforeseen

loss has been insured against or not. In case of insurance the consignment

account will be credited but the insurance companies or underwriter’s

account will be debited with the amount of loss (which shall be calculated

like valuation of stock on consignment i.e. including proportionate non-

recurring expenses of both the consignor and the consignee). If the goods

are not insured, instead of Insurance Company’s or Underwriter’s Accounts

being debited, Profit and Loss Account will be debited and consignment

account will be credited. In this way the final net profit on consignment is

not adversely affected.

2.8 INVOICING GOODS HIGHER THAN COST

Sometimes the goods sent on consignment are priced not at cost but

above cost i.e. at selling or near selling price. The purpose is to hide the real

profit on the consignment from the competitive eye of the consignee. It

does not affect the profits of the consignor. Here a few adjusting entries in

respect of goods sent on consignment and stock are to be made at the end

of the financial year. The entries are as follows :

To bring down the invoice of the goods sent on consignment to cost,

debit goods sent on consignment account and credit consignment account

with the difference in the invoice and the cost price.

(i) Goods sent on consignment A/c Dr.

To consignment A/c

(Being the excess of Invoice price written back)

 To adjust the value of the stock lying unsold with the consignee, debit

the consignment account and credit ‘Stock Reserve Account’ with the

difference in prices.

(ii) Consignment A/c Dr.

To Consignment Stock Reserve A/c

(Being the excess of invoice price or value over cost Price

of unsold stock adjusted).

The balance of the goods sent on consignment account will be

transferred to the Trading Account as indicated earlier. The stock on

consignment and Stock Reserve Account will be closed and the balance will

be shown in Balance sheet.

Next year the stock on consignment account will be transferred to the

debit of the ‘Consignment Account’ and Stock Reserve Account will be

transferred to the Consignment Account (of course at the end of the next

year.)

2.9 SUMMARY

Consignment is a specialized kind of transaction between consignor and

consignee, whereby consignor sends goods to consignee to be sold by the

latter on behalf of the former for a mutually agreed commission. The goods

consigned to the agent cannot be treated as sales at the time of the

consignment, they are treated as sales only when those are sold by the

consignee. In a consignment transaction, the consignor sends goods to the

consignee and makes a bill called Proforma Invoice. The value recorded in the

proforma invoice may be the actual cost to the consignor or actual cost to

the consignor plus mark-up. The objective of consignor in making accounts

relating to consignment are to ascertain the results of consignment and to

make final settlement with the consignee. To achieve this, he prepares

consignment account and consignee account. The consignee makes accounts

relating to consignment relating to consignment to effect the settlement

with the consignor and to recognize his commission entitlement as consignee.

2.10 KEYWORDS

Consignment: A shipment of goods by a manufacturer or wholesale dealer to

an agent to be sold by him on commission basis, on the risk and account of

the former, is known as consignment.

Consignor: The person who sends the goods to the agent to be sold by him as

commission basis is called the consignor.

Del Credere Commission: It is a commission which is paid by the consignor to

the consignee for taking additional risk of recovery of debts on account of

sales made on credit by the consignee on behalf of the consignor.

Account Sales: It is a statement which contains the details of sales,

expenses incurred and commission entitlement and balance due to the

consignor.

Normal Loss: The normal loss is one which cannot be avoided because of the

basic nature of the goods/processes involved.