CONSIGNMENT

ACCOUNTS
MAIN POINTS

ntroduction (2| Features 13| Difference hetween Consignment and Sale

14/Difference between Consigument and Sale or Return 15/ Procedure of
Consignment Business (6]Books ef Consignor 17| Entries in the Books of the
Comsignor : () Journal Entriex (2) Consigument Aceount (3) Consignee's
Account(8] Books of he Consignee : (1) Entries in the books of the Consignee
(2) Ledger af the Consignee 19) Advance agains1Consignment |10] Account Sale
11|Valuation of Closing Siock |12/ Del Credere Commission j13j Loss of Goods
Sent on Consignment. (14| Pro-forma Invoice [15/ Goods Invoiced at Selling
Price |16| Rectifiction of Errors |17| Incorporuting Consignment Trunsactions
ito Final Accounts 18/ Inportaunt Points Exercise

1. INTRODUCTION :
Sales is the lifeblood of any business and every business enterprise tries to
increase its sales either in the country or outside the country. If it has no
resources to open a branch in a distant city or in a foreign country, it wil sell
through some experienced dealer there. This method of selling goods is called
"Consignnent." One of the methods of selling goods in a foreign country or in
a distant market is to sell through agents. A manufacturer or a wholesaler
appoints an experienced dealer in a foreign market for this purpose. Such dealers
are conversant with conditions prevailing inthe foreign markets. They are in touch
with customers and know their likes and dislikes. The agents would sell goods on
behalf' of theowner of the goods and at his risk. He gets commission for the services
that he renders. Such an arrangement is known as C'onsignment.
Inshort, the method of selling goods through an agent in a foreign country
or in a distant place of the same country on commission and at the risk of the
Owner is termed as C'onsignment Business.
The businessman who sends goods to the agent is called a C'onsignor and the
person to whom goods are sent is known as a Consignee. It is Consignment
Outward for the ower of the goods and C'onsigment lnward for the agent. The
remuneration paid to the consignee is known as Commission.
|2. FEATURES
From the above explanation, it is clear that consignment is not a sale. The
Agent does not buy the goods. Ownership in goods is not transferred. The
lollowing are the salient features of the consignment
KC\I-Consi-Act--1-(-112(023
(1)
 2

(I) There are two parties involved in Consignment business :

SUDIIR PRAKASILAN
() Consignor and (ii) Consignce.
(2) The relation between the two parties is that ofa
It is not that of a buyer and a seller as the ownership of principal and an
goods are not agernt,
(3) Goods are sold at the risk of the
consignor only. Profit or
consignment belongs to him. The consignee is concerned with his transfer ed.
loss on
(4) If the goods are damaged or destroyed, the
in any way. consignee is commi
not ssion
only,
responsible
(5) The consignee is entitled to recover all
connection with the consignment. expenses that he
(6) Ifthe goods reeceived on
in incurs
such goods to the consignor. consignment unsold, the
is
(7) The consignee is bound to take
consignee
can return
him, though he is not proper care of the goods
received
responsible the goods are damaged or destroyed.
if
(8) Generally, consignee
(9) Consignee has to sellgives some amount as an advance to the
the goods according to the consignor
consignor. instructions of the
3.
DIFFERENCE BETVWEEN CONSIGNMENT AND SALE:
In both
consignment and sale, the owner of the goods parts with
possession of
goods. But the consignment is not a sale. The the
points of distinction : following are the
Points
1. Ownership :
Consignment Sale
In casc of the
consignment, thc In salc. the
owncrship of goods remains with ownership of
goods passes from the scller
the consignor. The consigncc
docs not becomc the owner. to the buyer.
2. Debtor The consigncc docs not becomc In casc of a sale, the buycr
Creditor a dcbtor in casc of
consignmcnt.
He has not to pay anything to the
becomes a debtor if it is a
Relationship : credit sale.
consignor, unlcss the goods are
actually sold.
3. Return of The consignce can return the A seller is not bound to
goods : goods lying unsold with him. accept thc return of goods in
case of asale.
4, Loss or gain : Incasc of consignment, the loss In sale, the profitor loss aler
or damagc to goods must be sale belongs to the buyer
borne by the consignor. Similarly. only.
any gain accruing lo the goods
also bclongs to theconsignor.
Expenses : Allcxpenscs of consignment must Generally, expenses are
be bornc by the consignor only. bornc by the buyer in sale.
CONSIENMENTACCOUNTS 3

6. Recovery : TIe consignor can gct the goods| In salc, as the owncrship has
|back from the consignce al any passcd from the seller tw the
time. buyer. thc seller cannot obtain
goods back for non-payment of
the pricc. lle can only suc thc
buyer for recovering the price
of the goods sold.
7. Nature : This is an agency arrangement, This is an agreement to scll, in
in which a consigncer is not whích goods are exchangcd
bound to pay any moncy to against consideration.
|consignor helorc goods arc sold.
8. Loss : |Asthe goods bclong lo consignor Ater sale. the buyer bcomes
he has to bear all losses. the owncr of the g00ds and so
he has to bear uny losses that
may occur after salc.
9. Recognition of There is no recognition of The revenuc is recogniscd
Revenue: revenuc or incomc, when the immediatcly when the sale is
consignor sends goods. cllcctcd.
10. Profit or Loss: Consignec is not concerncd with After sale. the buycr becomes
|cither profit or loss of cntitled to any profit or loss that
consignment. accruc.
(11) Nature of goods : |Under consignmcnt only Under sale, m0vable and
movable assets can be dealt with. immovablc both types of asscts
can be dealt with.

4. DIFFERENCE BETWEENCONSIGNMENT AND SALE OR RETURN :

Points Consignment Sale or Return
(1) Purpose : The purpose of consignment is to The purpose of sale or return is
scll goods through consignee. losell goods on condition that he
may keep the goods if he likes,
or he may rcturn.
(2) Relation:Thc relation betwcen consignorThc person who reccives goods
and consignceis that of principal on sale or return is a prospective
and agent. The consigncc docs customer. Ifhe accepts the goods.
not become the debtor whcn he thc relation of seller and buyer
reccivcs goods. devclops bctwecn two partics.
(3) Accounting When goods arc Sent on Goods scnt on sale or rclurn is
consignment, it is not rccorded somctimes treated as sale and
entries :
as sale. In order to show that when the customr returns
goods have gone out, he goods goods. it is trcated as sales
sent on consignment account isreturn. But generally. it is not
creditcd. Ircated as salc.
(4) Stock : At the end of the ycar. thc If at thc cnd of the ycar, some
closing stock of consignment is goods are lying with the
shown on the credit side of customer, it is shown on thc
Trading Account. credit side of Trading Account.
 5. PROCEDURE OF CONSIGNMENT BUSINESS.
SUDIIR PRAKASILAN
The following procedure is generally seen
in
(1) The consignor sends goods to thhe
He sends an invoice alongwith the
goods, consignee consignment
to be soldbusiness:
on his
which is called
(2) The consignor pays
certain
e.g. freight, insurance premium etc. expenses while Pro-forma
sending goods on Invoice.
behalf.
These are expenses
(3) Sometimes, the
consignee
consignor. This may be in the form of a gives some am0unt
of
un
consignment.
usconsignment.
bill is drawn by the bank draft or a bill of advance to the
consignor. consignor
If the consignor is
and the consignee
accepts exchange.
it and returns it to The
bill with the bank. in need of money immediately, he may discount the
The discount on such a bill is the
consignment business. treated as an expense of
(4) The
which he paysconsigneecertain
now gets the goods
released from the carrier for
expenses.
expenses are paid by the consignee first e.g. carriage, customs, octroi etc. These
consignor. and then he recovers
them from the
(5) Now the
consignor. He thenconsignee sells goods according to the
instructions of the
expenses etc. to the prepares and sends a stutement
showing details of
(6) The items consignor.inThis statement is called Account Sales. sales
sales, expenses paidmentioned the Account Sales are
by consignee, his generally, the amount of
balance amount due to consignor. If he is commission, advance paid by him and the
sales, he mentions the mode of sending this annount with the account
(7) When the consignor payment like bank draft or bill etc.
his books about the items receives the Account Sale, he
in it e.g. sales, expensesmakes
an entry in
commission and the amount mentioned of consignee, his
received from him.
6. BOOKS OF THE CONSIGNOR
In the books of the Consignor,
generally following three accounts are
prepared for consignment business :
(1)Consignment Account: The consignor opens a
separate
Consignment Account for cach consignment. This would discloseaccount called
profit or loss
on each consignment. Generally, this account is known by the name of the
consignee or the name of the town where the goods are sent on consignment, e
Naik's Consignment Account, Poona Consignment Account etc.
lt must be remembered that the Consignment Account is not the accou
ol the Consignee. It isonly a Profit & Loss Account of Consignment Business.
with When goodsof aregoods
the value sent sent
on consignment, Consignment
and "Goods sent Account' Account"
on Consignment is debitedis
credited. of
The expenses incurred by the consignor on goods sent are expenses
consignment business and hence they are debited to Consignment Account.
CONSIGNMENTACCOUNTS
5
When Account Sale is received from the
Rva recorded in the books of the consignor viz. consignec,
the four items out of it
(i) TIhe amount of sales is credited
nConsignment Account and debited to Consignee's Account, because the
consignec becomes the debtor. (1) The expenses paid by the
dcbited to Consignment Account (iii) consignee are
similarly debitcd to Consignment A/c andCommission payable to consignee is
credited to Consignee's Alc. (iv) The
annount sent by the consignee is credited to his account.
(2) Goods Sent on
Consignment Account : When goods are sent on
consignment, goods go out of business. According to rule 'credit what goes out'.,
the Goods Account must be
credited. To describe how the goods have gone out,
the account prepared is called "Goods
Sent on Consignment Account." At the
end of the year, this account prepared is
closed and transferred to the Credit of
Trading Account. Some authors transfer it to the credit of Purchases Account
also.
(3) Consignec's Account: This account is prepared in the books of the
Consignor. The following transactions are recorded in it :(1)
the consignee. (2) Sales made by the Expenses paid by
consignee (3)
consignee (4) B/R or bank draft received from Commission payable to the
amount of bad debts, when no del credere the consignee and (5)The
The following transactions are not commission is payable.
()Expenses paid by the consignor (2)recorded in the account of the consignee:
returned by the consignee (4) Closing Goods sent by the consignor (3) Goods
stock (5) Discount on bills discounted
(6) Profit of consignment.
 12. DEL CREDERE COMMISSION:
Generally. commission is allowed to the consignee on the gross sale
proceeds. The consignee does not undertake any responsibility for bad debts in
case of credit sales. But the consignor does not know anything about the
financial position of the customer who purchases on credit from the consignee.
Hence, the consiqnor would like toshift this responsibilityto the consignee, who
is in touch with the customers. An extra commission is allowed for undertaking
the risk of bad debts arising out of credit sales. This extra commission is termed
Del Credere Commission. When Del credere commission is allowed to the
consignee, he pays the full amount of credit sales and bears the bad debts,
if any. In such acase, no entry is passed for bad debtsin the books of the
consignor.
(a) Del credere commission is calculated.only on credit sales if it is given in
the example. Some accountants believe that the del credere commission
should be calculated on total sales and not only on credit sales. It is because
 20 SUDHIR PRAKASILAN
if del credere commission is allowed on credit sales, then the consignee will
show all sales as credit sales, even though a part of it may be cash sale.
(b) If the total sale is given but the anount of the credit sale is not specified
then the total sales should be considered as credit sales and del credere
commission should be calculated accordingly.
(c) If credit sales and cash sales are not separately given, but if it is possible
to find out credit sales from the information given, the del credere
commission is calculated on credit sales only.
(d) No del credere commission should be allowed on goods purchased by the
consignee himself.
Del Credere Commission

() Ifcrcdit sale is (2) No del credere (3) If cash sales (4) If credit sales
given. Del commission i and credit can be
Credere Com. payable On sales arc not calculated
should be goods sold on separately from the
calculatcd on credit on the given. Del detuils given in
credit sales. rccommendation Credere Cxample, then
of consignor. Commission it should be
should be caleulated on
calculated on credit sales
total sales. only.
 BBA

Consignment Account

Meaning:-
An account for goods that is sent to a person or company that is not the owner but
is responsible for selling them or returning them to the owner if they are not sold:
Introduction:
Consignment accounting is a type of business arrangement in which one person send goods to
another person for sale on his behalf and the person who sends goods is called consignor and another
person who receives the goods is called consignee, where consignee sells the goods on behalf of
consignor on consideration of certain percentage on sale.

Features:
➢ Two Parties: Consignment accounting mainly involves two party’s consignor and consignee
➢ Transfer of Procession: Procession of goods transferred from consignor to consignee
➢ Agreement: There is a pre-agreement between the consignor and consignee for terms and
conditions of the consignment
➢ No Transfer of Ownership: The ownership of goods remains in the hands of the consignor until
the consignee sells it. The only procession of goods is transferred to a consignee.
➢ Re-Conciliation: At the end of the year or periodic intervals consignor sends Proforma invoice
while consignee sends account sale details and both reconcile their accounts
➢ Separate Accounting: There is independent accounting done of consignment account in the
books of consignor and consignee. Both prepare consignment account and record the journal
entries of goods through consignment account only.

Key Words:
➢ Consignor: It is the person that sends goods.
➢ Consignee: The person who receives the goods is called the consignee.
➢ Consignment: Consignment is a business arrangement through which the consignor sends goods
to the consignee for sale.
➢ Consignment Agreement: It is legally written communication between the consignor and
consignee, which defines the terms and conditions of the consignment.
➢ Pro-Forma Invoice: When the consignor sends goods to the consignee, he also forwards
statements showing details of goods such as quantity, price, etc. and that statement is called the
Pro-forma invoice.
➢ Non- Recurring Expenses: Expenses that are incurred by the consignor to dispatch the goods
from his place to place of the consignee are called non-recurring expenses. These expenses are
added to the cost of goods.
➢ Recurring Expenses: The consignee incurs these expenses after the goods reached his place.
These expenses are of maintenance of goods type’s expenses.
➢ Commission: Commission is the reward/ consideration for the sale of goods on behalf of the
consignor. It is as per the consignment agreement.
➢ Account Sale: It is the statement forwarded by the consignee to consignor showing details of
goods sold, amounts received, expenses incurred, a commission charged, advance payment and
balance due and stock in hand, etc.
Advantages:
➢ Increase in Business Exposure: Due to consignment sales increase, thereby increase in business
exposure. It is a cost-effective method to expand the business.
➢ Lower Inventory Cost: Less inventory holding costs for the consignor.
➢ Incentives to Consignee: When consignee sells on behalf of the consignor, the former receives
a commission and other incentives.
➢ Business Growth: Consignment benefits both consignor and consignee. Consignor gets lower
inventory bearing cost, and consignee without investment earns the commission by selling on
behalf of the consignor

Disadvantages:
➢ Lower Profit Margin: Due to consignment, the consignor has to pay commission to the
consignee, thereby resulting in a lower profit margin in the hands of the consignor.
➢ Negligence by Consignee: Consignee’s negligence may create the problem.
➢ Risk of Goods Damaged: There is a high risk of goods damaged at the consignee’s place or
during transport, especially perishable goods.
➢ High Charges: Sometimes, there are high maintenance charges of goods to be borne by
consignee and high shipping or conveyance charges to be borne by consignor. This is the place
of the consignee, and the consignor is far away from each other.
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”.

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.
➢ 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