CONSIGNMENT TRANSACTIONS
MEANING OF CONSIGNMENT ACCOUNT
To consign means to send. In Accounting, the term “consignment
account” relates to accounts dealing with a situation where one person
(or firm) sends goods to another person (or firm) on the basis that the
goods will be sold on behalf of and at the risk of the former. The
following should be noted carefully:
(i) The party which sends the goods (consignor) is called principal.
(ii) The party to whom goods are sent (consignee) is called agent.
(iii) The ownership of the goods, i.e., the property in the goods, remains
with the consignor or the principal
– the agent or the consignee does not become their owner even
though goods are in his possession. On sale, of course, the buyer
will become the owner.
(iv) The consignor does not send an invoice to the consignee. He sends
only a proforma invoice, a statement that looks like an invoice but
is really not one. The object of the proforma invoice is only to
convey information to the consignee regarding particulars of the
goods sent.
(v) Usually, the consignee recovers from the consignor all expenses
incurred by him on the consignment.
(vi) It is also usual for the consignee to give an advance to the consignor
in the form of cash or a bill of exchange. It is adjusted against the
sale proceeds of the goods.
(vii) For his work, the consignee receives a commission calculated on the
basis of gross sale. For ordinary commission the consignee is not
responsible for any bad debt that may arise. If the agent is to be
made responsible for bad debts, he is to be paid a commission
called del-credere commission. It is calculated on total sales, not
merely on credit sales until and unless agreed.
(viii) Periodically, the consignees send to the consignor a statement
called Account Sales. It sets out the sales made by the consignee,
the expenses incurred on behalf of the consignor, the commission
earned by the consignee and the balance due to the consignor.
DISTINCTIONS
CONSIGNMENT AND SALE
S.N Consignment Sale
o.
1. Ownership of the goods The ownership of the
rests with the consignor till goods transfers with the
the time they are sold by
the consignee, no matter transfer of goods from the
the number of goods seller to the buyer
transferred to the
consignee.
2. The consignee can return Goods sold are the property
the unsold goods to the of the buyer and can be
consignor. returned only if the seller
agrees.
3. Consignor bears the loss of It is the buyer who will bear
goods held the loss if any, after the
transfer of goods.
4. The relationship between The relationship between the
the consignor and the seller and the buyer is that
consignee is that of a of a creditor and a debtor.
principal and agent.
5. Expenses done by the Expenses incurred by the
consignee to receive the buyer are to be borne by
goods and to keep it the buyer itself after the
safely are borne by the transfer of goods
consignor unless there is
any other agreement.
1. DISTINCTION BETWEEN COMMISSION AND
DISCOUNT
Commission Discount
Commission may be defined as The term discount refers to any
remuneration of an employee reduction or rebate allowed and is
or agent relating to services used to express one of the following
performed in connection with situations:
sales, purchases, collections or An allowance given for the settlement
other types of business of a debt before it is due i.e. cash
transactions and is usually based discount.
on a percentage of the amounts
involved. An allowance given to the whole
Commission earned is sellers or bulk buyers on the list
accounted for as an income in price or retail price, known as trade
the books of accounts, and discount. A trade discount is not
commission allowed or paid is shown in the books of account
accounted for as an expense in separately and it is shown by way of
the books of the party availing deduction from cost of purchases.
such facility or service.
VALUATION OF INVENTORIES
The principle is that inventories should be valued at cost or net
realizable value whichever is lower, the same principle as is
practised for preparing final accounts.
In the case of consignment, cost means not only the cost of the
goods as such to the consignor but also all expenses incurred till
the goods reach the premises of the consignee. Such expenses
include packaging, freight, cartage, insurance in transit, import
duty etc.
But expenses incurred after the goods have reached the
consignee’s godown (such as godown rent, insurance of godown,
delivery charges, salesman salaries) are not treated as part of the
cost of purchase for valuing inventories on hand.
If details of expenses are not available, then for valuing
inventories the expenses incurred by the consignor should be
treated as part of cost while those incurred by the consignee should
be ignored. If the expected selling price of inventories on hand is
lower than the cost, the inventories should be valued at expected
net selling price only, i.e. expected selling price less delivery
expenses, etc.
ACCOUNTING FOR CONSIGNMENT TRANSACTIONS AND EVENTS IN
THE BOOKS OF THE CONSIGNOR
For ascertaining profit or loss on any transaction (or series of
transactions) there is one golden rule; open an account for the
transaction (or series of transactions) and (i) put down the cost of
goods and other expenses incurred or to be incurred on the debit
side; and (ii) enter the sale proceeds as also the cost of goods
remaining unsold on the right hand side or the credit side. The
difference between the total of the two sides will reveal profit or
loss. There is profit if the credit side is more.
The consignor records the following transactions in his book of
accounts:
1. When goods are consigned
or dispatched:
Consignment Account
Goods Sent on Consignment Account
2. Expenses incurred by consignor:
Consignment Account
Supplier Account/Bank/Cash
When advance is received from the consignee: The consignee may remit
some advance to consignor. The following entry is recorded:
Bank/Cash Account
Consignee’s Personal Account
3. On receipt of account sales from the consignee: Account sales
contains details of sales made by consignee, expenses incurred
by consignee. Following entries are recorded
For sales proceeds
Consignee’s Personal Account
Consignment Account
For expenses incurred by consignee
Consignment Account
Consignee’s Personal Account
4. Cash or cheque or bank draft or bill of exchange/promissory
note received from the consignee as settlement:
Cash/Bank/Bills Receivable Account
Consignee’s Personal Account
5. For bad debts: The accounting entry for bad debts will depend
on whether del-credere commission is paid to the consignee
i. When del-credere commission is
not paid to the consignee
Consignment Account
Consignee’s Personal Account
ii. When del-credere commission is paid to the consignee
No entry is recorded as bad debts is to be borne by
consignee.
6. For the goods taken over
by the consignee
Consignee’s Personal
Account
Consignment Account
7. For unsold consignment stock:
Consignment Stock Account
Consignment Account
COMMISSION
Commission is the remuneration paid by the consignor to the
consignee for the services rendered to the former for selling the
consigned goods. Three types of commission can be provided by
the consignor to the consignee, as per the agreement, either
simultaneously or in isolation. They are:
1. Ordinary Commission
commission simply denotes ordinary commission.
It is based on fixed percentage of the gross sales proceeds made
by the consignee.
It is given by the consignor regardless of whether the consignee is
making credit sales or not. This type of commission does not give
any protection to the consignor from bad debts and is provided
on total sales.
2. Del-credere Commission
To increase the sale and to encourage the consignee to
make credit sales,
the consignor provides an additional commission generally known
as del-credere commission.
This additional commission when provided to the consignee gives a
protection to the consignor against bad debts. In other words,
after providing the del-credere commission, bad debts are no
more the loss of the consignor.
It is calculated on total sales unless there is any agreement
between the consignor and the consignee to provide it on credit
sales only.
3. Over-riding Commission
It is an extra commission allowed by the consignor to the
consignee to promote sales at higher price then specified or to
encourage the consignee to put hard work in introducing new
product in the market.
Depending on the agreement it is calculated on total sales or on
the difference between actual sales and sales at invoice price or
any specified price. In order to encourage the consignee to earn
higher margins, it can also be in the form of share of additional
profits made by consignee on sale of goods.
ACCOUNT SALES
An account sale is the periodical summary statement sent by the
consignee to the consignor. It contains details regarding –
(a) sales made,
(b) expenses incurred on behalf of the consignor,
(c) commission earned,
(d) unsold inventories left with the consignee,
(e) advance payment or security deposited with the consignor and
the extent to which it has been adjusted,
(f) balance payment due or remitted.
It is a summary statement and is different from the Sales
Account.
ACCOUNTING IN THE BOOKS OF THE CONSIGNEE
Following entries are recorded in the books of consignee:
1. On making sales
Cash/Bank Account/Debtors
Consignor’s Personal Account
2. For expenses incurred
Consignor’s Personal Account
Bank Account
3. For advance paid to consignor
Consignor’s Personal Account
Bank Account
4. For recording bad debts
Bad Debts Account
Customer’s Account
5. For writing off bad debts
(a) When del-credere
commission is not allowed
Consignor’s Personal
Account
Bad Debts Account
(b) When del-credere
commission is allowed
Commission Account
Bad Debts Account
