Accounting For Consignment 1.0 MEANING OF CONSIGNMENT 1.

1 Consignment Consignment means the transaction of sending goods b one person to another, who is to sell those goods on behalf of the first person. 1.2 Consignor The person who sends the goods is known as consignor the person to whom the goods are sent is known as consignee. 1.3 Consignee The legal relationship between these two persons is that of principal and agent. 1.4 Example If X sends goods to Y for sale on his behalf, X is known as consignor or principal and Y is known as consignee or agent. 1.5 Outward/Inward Consignment The consignment is Outward Consignment for the person who sends the goods for sale and an Inward Consignment for the person who receives the goods for sale. 2.0 FEATURES OF CONSIGNMENT The main features of Consignment are as under: 2.1 The relationship between Consignor and Consignee is that of principal and agent. 2.2 Only the possession of goods and not the ownership of goods is transferred to the consignee. 2.3 Risk of goods remains with the Consignor because ownership of goods remain with the Consignor.

2.4

Consignee is entitled to reimbursement of expenses incurred by him on behalf of the Consignor as per agreement.

2.5 2.6

Consignee is entitled to an agreed remuneration. The profit/loss on sale of goods sent on Consignment belongs to the Consignor.

18.2 Fundamentals of Accounting for Common Proficiency Test (CPT) 3.0 DISTINCTION BETWEEN CONSIGNMENT AND SALE Consignment differs from Sale in the following respects:

Basis of Distinction
1. Nature of Relationship

Consignment

Sale

The relation between the con- The relation between the signor and the consignee is that of seller and the buyer is that of principle and agent. creditor and debtor. Only the possession and not the Both the possession and ownership is transferred to the ownership are transferred. consignee. Risk remains with the consignor Risk remains with the buyer because ownership remains with since ownership remains with the consignor. him. Consignor prepares proforma invoice. only a Seller prepares invoice. a sales

2. Ownership and possession of goods. 3. Risk of goods

4. Proforma/sales Invoice 5. Subject matter of dealing. 6. Who bears expenses

Only movable properly may be its subject matter.

Any property may subject matter.

be

its

Expenses incurred by consignee Expenses incurred after sale are borne by Consignee. by buyer are borne by him and not by seller. Profit/Loss on sale of belongs to After the sale is complete, the Consignor. profit/loss belongs to buyer. Goods can be returned if they are Return of goods is not not sold by the consignee. possible as goods once sold are usually not returnable. Account Sale has to be submitted No Account Sale is required by the consignee to the consignor to be submitted by the buyer from time to time. to the seller. Unsold goods with the consignee will be treated as stock of the consignor. The seller has nothing to do with the goods which could not be resold.

7. Profit/Loss

8. Return of Goods

9. Account Sales

10. Unsold Goods

3.0 PROFORMA INVOICE 4.1 When prepared When the consignor sends the goods to the consignee, he prepares only a proforma invoice and not an invoice. 4.2 Meaning and Objective A proforma invoice looks like an invoice but is really not one, the object of the proforma invoice is only to convey information to the consignee regarding quantity, varieties and prices of goods sent and expenses incurred and not to make him liable like a trade debtor. 5.0 COMMISSION 5.1 Meaning Commission is the remuneration paid to the consignee by the consignor is consideration of the services rendered by the former in selling the goods consigned. This commission can be divided into two types (a) Ordinary Commission, and (b) Special Commission. 5.2 Ordinary Commission It is a commission usually paid as fixed percentage on gross sale proceeds. The term commission normally The denotes ordinary commission, unless specified otherwise.

consignee is not responsible for any bad debts and he does not guarantee the payment from all those who buy on credit so long as he is getting ordinary commission only. 5.3 Special Commission This is the commission which the consignee gets over and above the ordinary commission. It can be sub-divided into two categories viz., (a) Over-Riding Commission and (b) Del-Credere Commission. 18.2 Fundamentals of Accounting for Common Proficiency Test (CPT) (a) Over-riding Commission

(i) Meaning Over-riding commission is an extra commission allowed over and above the normal commission is generally offered. (i) when the agent is required to put in hard work in introducing a new product in the market. (ii) where he is entrusted with the work of supervising the performance of other gents in a particular area. (iii) for effecting for sales at prices higher than the price fixed by the consigner. (b) Del-Credere Commission (i) Meaning Del-Credere Commission is an additional commission paid by the consignor to the consignee for bearing the loss on account of bad debts, if any, arising out of credit sale of consignment goods. In case of a dispute regading the delivery of quality etc., if a customer has deducted a particular amount, the consignee will not bear this loss even if he is getting a delcredere commission. Thus, del-credere commission is a kind of insurance premium paid to cover the risk of bad debts. (ii) Who will bear the Bad Debts? If Consignee gets Del-credere Commission Consignee will bear the risk of bad debts If Consignee does not get Del-credere Commission Consignor will bear the risk of bad debts.

(iii) How to Calculte Del-credere Commission may be allowed on credit sales or total sales. However, in the absence of any such agreement, the consignor allows such commission on total sales and not merely on credit sales.

5.4 Distinction

between

Ordinary

Commission differs

and from

Del-Greding Del-credere

Commission

Ordinary

Commission

Commission in the following respects: Basis of Distinction 1. When allowed? Ordinary Commission Del-credere Commission

It is allowed to all the It is allowed to the consignee consignees for all the only when he undertakes the consignments for selling risk of bad debts arising out of goods. credit sales. In return of this commission, In return of this commission, consignee guarantees only consignee guarantees the the proceeds of cash sales. proceeds of cash sales and credit sales. It is calculated at an agreed It is calculated at an agreed rate on the total sales. rate either on total sales (if no agreement) or credit sales (if agreement provides).

2. Guarantee

3. How to Calculate?

5.5 Distinction

between

Del-Credere

Commission

and

Over-riding

Commission Del-Credere Commission differs from Over-riding Commission in the following respects: Basis of Distinction 1. When allowed? Del-credere Commission It is allowed to the consignees when he undertakes the risk of bad debts arising out of credit sales. Over-riding Commission It is allowed to the consignee to push sales or to effect sales at price higher than price fixed by the consignor.

2. Guarantee

In return of this commission, In return of this commission, consignee guarantees the consignee does not give any proceeds of cash sales and guarantee.

credit sales. 3. How to Calculate? It is calculated either on total sales (if no agreement) or credit sales (if agreement provides). It is calculated on difference between Actual total sales and sales at specified selling price (if no agreement) or on actual total sales (if agreement provides).

18.6 Fundamentals of Accounting for Common Proficiency Test (CPT) ILLUSTRATION 1 (Calculation of Commission) Mr X sent 250 units costing Rs.10,000 each to Mr. Y. The goods were to be sold so as to yield a gross profit of 20% on sales. Mr. Y sold 150 units @ Rs.14,200 per unit on credit and 75 units @ Rs.14,000 for each. Calculate the commission due to Mr. Y in each of the following alternative cases. Case (a) Mr Y was entitled to a commission of Rs.500 per unit. Case (b) Mr Y entitled to an ordinary commission of 5% and del-credere commission of 2%. Case (c) Mr Y was entitled to an ordinary commission of 5%, del-credere commission of 2% on sales and an over-riding commission of 25% of any surplus realized. Case (d) Mr Y was entitled to an ordinary commission of 5% on total sales, del-credere commission of 2% on credit sales and an over-riding commission of 25% of any surplus realized. Case (e) Mr Y was entitled to a commission of Rs.500 per unit of sold plus 25% of any surplus price realized. Case (f) Mr Y entitled to a commission of Rs.500 per unit sold plus 25% of any surplus realized as reduced by total commission. Case (g) Mr Y entitled to a commission of Rs.500 per unit sold plus forth of the amount by which the gross sale proceeds less total commission thereon exceeded a sum calculated at the specified selling price.

ILLUSTRATION 2 (Adjustment of various types of commissioner) M/s. Jalan Traders consigned 10,000 units to M/s. Rahul Agencies on 1 st April, 20x1 on the following terms: (a) All units to be sold 50% above the cost of Rs.20. Any deficiency in selling price is to be borne by Y who is also entitled to retain 50% of any surplus price realized. (b) M/s. Rahul Agencies is to be paid 3% commission and 2% Del-Credere commission on all sales at specified sales price. M/s. Jalan Traders incurred packing, freight, Insurance charges of Rs.47,500 in consigning these goods. Rahul Agencies remitted Dena Bank DD No.420 dated 1st July 20x1 for Rs.50,000 as advance. M/s. Rahul Agencies sent Account Sales on 31 st March, 20x2 disclosing 2,500 kg, sold @ Rs.30 per kg., 2,000 kg, sold @ Rs.28 per kg., 3,000 kg., sold @ Rs.32 per kg. M/s. Rahul Agencies had incurred unloading charges of Rs.9,800 and selling expenses of Rs.16,450. He had collected the entire sale proceeds from all customers except from one who paid only 75 paise in rupee for his debt of Rs.4,000 and from another who deducted Rs.150 because of a dispute regarding quality. On 31 st March 20x2, M/s. Rahul Agencies remitted the balance due vide Dena Bank Draft No.1000. You are required to calculate the commission due to consignee. 18.8 Fundamentals of Accounting for Common Proficiency Test (CPT) 6.0 ADVANCE 6.1 It is a common trade practice for the consignor to demand some advance from the consignee as a security for the goods dispatched to him. 6.2 It may be in the form of cash or bank draft or in the form of a bill of exchange.

6.3 The consignee will send some amount as an advance before or after he receives the goods from the consignor. 6.4 The advance received from the consignee should not be credited to Consignment Account as it is not a part of the sale proceeds. 6.5 The advance will be adjusted against the amount due from the consignee when the accounts are finally settled. 6.6 In some cases, a bill may be drawn on the consignee if he is not in a position to pay advance money. The consignor can discount the bill with his bankers. In such a case the value of the bill (as advance) so accepted will be deducted from the sale proceeds. The discount paid to the bank should be charged to the Profit & Loss Account and not to Consignment Account because it represents the cost of raising finance and not the cost of consignment. 6.7 The worth noting point here is that while calculating the amount due from the consignee, the proportionate advance pertaining to unsold goods should not be adjusted. 6.8 Such proportionate advance should appear as a credit balance in Consignees Account in the books of Consignor. 7.0 ACCOUNT SALES 7.1 Meaning An Account Sales is a statement sent by the consignee to the consignor periodically. 7.2 Contents It contains the information like (i) Sales made (ii) Expenses incurred on behalf of Consignor (iii) Commission earned (iv) An Advance (if any) given (v) the balance due to the principal.

7.3 An Account Sales is different from Sales Account (which provides only the summary of sales made for cash and on credit). ILLUSTRATION 3 (Preparation of Account Sales) 8.0 INVOICE PRICE AND LOADING 8.1 Sometimes, the Consignor does not want to reveal the cost of goods to the Consignee and therefore, invoices goods at a price which is higher than the Cost Price (CP). Such price is known as Invoice Price (IP) and the difference between the Invoice Price (IP) and the Cost Price (CP) in called loading. 8.2 It may also be noted that invoice price need not necessarily be same as selling price unless the Consignor directs the Consignee to sell the goods at the invoice price itself. 8.3 When goods are sent at invoice price, to ascertain correct profit/loss on consignment, the items recorded at invoice price should be brought down to cost price level. For this purpose, the loading included in various items (like opening Stock, Goods Sent on Consignment, Goods Returned by Consignee, Closing Stock) should be eliminated by passing the necessary adjusting entries in the books of Consignor only. 18.8 Fundamentals of Accounting for Common Proficiency Test (CPT) ILLUSTRATION 4 (Calculation of Invoice Price and Loading) Calculate Invoice Price and loading in each of the following alternative cases: (a) Goods sent on Consignment Rs.1,20,000 (Cost), Goods are invoiced at cost plus 25%. (b) Goods sent on Consignment Rs.2,40,000 (Cost), Goods are invoiced at 25% above cost. (c) Goods sent an Consignment Rs.4,80,000 (Cost), Goods are invoiced at 125 of the Cost Price.

(d) Goods sent on Consignment Rs.1,20,000 (Cost), Goods are invoiced to give a gross margin of 20% on invoice price. ILLUSTRATION 5 (Calculation of Cost Price and Loading) Calculate Cost Price and loading in each of the following alternative cases: (a) (b) Goods sent on Consignment Rs.1,50,000 (Invoice Price), Goods are invoiced to give a gross margin of 20% on Invoice Price. Goods sent on Consignment Rs.3,00,000 (Invoice Price), Goods are invoiced at cost plus 25%.

9.0 VALUATIN OF UNSOLD STOCK LYING WITH THE CONSIGNEE 9.1 Basically stock is to be valued at cost price or market price whichever is lower on the principle of Prudence (Conservatism) (i.e., ignore anticipated profit but provide for anticipated losses). 9.2 Cost price for this purpose means the purchase price plus expenses which are incurred to bring the goods to their present location and condition (whether incurred by consignor or consignee). 9.3 Market price here refers to net realizable value (NRV) i.e., the value which shall be realized if unsold goods in stock are disposed off in the market and not the Replacement Value i.e., the value which shall be required to replace the unsold goods in stock. 9.4 Net Realisable Value is considered under Historical According whereas Replacement Value is considered under, Inflation Accounting. 9.5 Since, we are at present working under Historical Accounting, we are more concerned with Net Realisable Value. 9.6 Practical Steps to value the unsold stock are given below:

Practical Steps in the Valuation of Unsold Stock Step 1 Compute the Cost of Unsold Stock as under: A. B. C. D. Units Cost of Goods sent by Consignor x Addl. All Expenses incurred by Consignor -Total Cost of Goods sent (A+B) -Less: Cost of Goods not reached the city of Rs. xxx xxx xxx

Consignee a) Goods lost-in-Transit x xxx b) Goods still-in-transit x Xxx E. Cost of Goods reached the city of Consignee (C-D) X Xxx F. Add: Non-recurring Expenses incurred by Consignee -Xxx G. Cost of Gods received by Consignee (E+F) X Xxx H. Less: Expected Normal loss (units only) X Xxx I. Cost of Goods available for sale (G-H) X Xxx J. Cost of Unsold Stock X xxx Step 2 - Compute Net Realizable Value A. Unsold Units B. Realizable Value per unit. C. Total Realizable Value (A x B) D. Less: Realization Expenses (e.g. Commission on Sales) E. Net Realizable Value (C D) Step 3 - Value of Unsold Stock (amount as per Step 1 or 2 whichever is lower) Tutorial Notes (i) Non-recurring expenses of consignee refer to those expenses which are incurred in order to bring the inventories to their present location and condition, whereas recurring expenses refer to those expenses which cannot be considered as relating to putting the inventories in their present location and condition. Examples of Consignors Examples of Consignees Expenses Expenses (i) Carriage outward A. Of Non-recurring B. Of Recurring Nature Nature (ii) Freight (i) Clearing charges (i) Warehouse charges (iii) Insurance (ii) Custom duty, (ii) Insurance charges Ocroi, etc. (iv) Packing (iii) Carriage inward/ (iii) Office & Administration Transport Expenses

charges upto Godown

(iv) Selling & Distribution Expenses (v) Godown rent.

(ii)

Realizable expenses refer to those expenses which are required to be incurred in order to dispose off unsold goods in stock e.g. Consignees commission is a realizable expense if he does not propse to waive as such.

ILLUSTRATION 6 (Valuation of Closing Stock in hand) Mr X provides you the following information: 1. 2. 3. 4. 5. Good sent by Mr X to his agent Mr Y 10,000 Units @ Rs.20 per unit. Mr Xs Forwarding and Insurance Expenses Rs.50,000 Agent took delivery and brought the goods to his godown after incurring expenses @ Re.1 per unit. Goods sold by Agent 7,300 units @ Rs.30 Agents Commission 5% alternative. Case (a) If no other information is given. Case (b) If owing to fall in market price, the value of normal stock is to be reduced by 10% Case (c) If owing to depression in the market, a special trade discount of 10% is to be allowed to sell normal stock. ILLUSTRATION 7 (Valuation of Closing Stock in transit) Mr X provides you the following information: 1. Good sent by Mr X to his agent Mr Y-10,000 Units @ Rs.20 per unit. 2. Mr Xs Forwarding and Insurance Expenses Rs.50,000 3. Goods still-in-transit-200 units. 4. Agent took delivery and brought the goods to his godown after incurring expenses @ Re.1 per unit.

Required: Calculate the amount of Closing Stock in each of the following

5. Goods sold by Agent-7,300 units @ Rs.30 Required: Calculate the amount of Closing stock 10.1 Meaning Abnormal loss is an avoidable loss which occurs due to abnormal factors like fire, theft, abnormal spoilage/leakage/breakages/pilferage etc and not due to inherent nature of goods. 10.2 10.3 10.4 Treatment It is not treated as a part of cost. Valuation Its value is calculated in the same manner as the value of unsold stock. Journal Entry The following journal entry is passed to account for such a loss. -----------------------------------------------------------------------------------------------------Profit & Loss Account Insurance Companys Account To Consignment Account 10.5 Dr. (With Irrecovered loss)
Dr. (With the claim admitted by Insurance Co.,)

(With total loss)

An abnormal loss may occur either before the goods are received by the consignee (i.e. loss during transit) or after the goods are received by the consignee (i.e. loss in Consignees godown).

10.6

The point to be noted here is that when loss occurs during transit, the non-recurring expenses incurred by Consignee should be charged to the goods received by the consignee (i.e. total goods sent minus goods lost in transit & goods still in transit) only.

10.7

How to calculate The amount of abnormal loss during transit and in Consignees godown may be calculated as under.

Statement showing the calculation of abnormal loss during transit A. Cost price of Goods lost during transit B. Add: Consignors proportionate Expenses (i.e. Consignors Total Expenses x Units Lost/Total Unit Xxx Xxx xxx

sent) C. Cost of Abnormal Loss during transit (A+B) Statement showing the calculation of abnormal loss in consignees Godown A. Cost Price of Goods lost in Consignees Godown B. Add: Consignors Proportionate Expenses (i.e. Consignors Total Expenses x Units Lost/Total Unit sent) C. Add: Consignees Proportionate Non-Recurring Expenses (i.e. Consignors Total Non-returning Expenses x Units Lost/ Total Units received by Consignee). D. Cost of Abnormal Loss in Consignees Godown (A+B+C) ILLUSTRATION 8 (Valuation of Closing Stock when there is Abnormal loss-in-transit) Mr. X provides you the following information: 1. per unit. 2. 3. 4. 5. Mr Xs Forwarding and Insurance Expenses Rs.50,000 Goods fully damaged in transit-200 units (Insurance Co. paid 80% of loss) Agent took delivery and brought the goods to his godown after incurring expenses @ Re.1 per unit. Goods sold by Agent -7,300 units @ Rs.30 Good sent by Mr X to his agent Mr Y 10,000 Units @ Rs.20 xxx Xxx Xxx Xxx

Required: Calculate the amount of closing stock and Net Loss incurred on goods fully damaged-in-transit. ILLUSTRATION 9 (Valuation of Closing Stock when there is Abnormal Loss-in-agents godown)

Mr. X Ltd. provides you the following information: 1. Good sent by Mr X to his agent Mr Y 10,000 Units @ Rs.20 per unit. 2. Mr Xs Forwarding and Insurance Expenses Rs.50,000 3. 4. 5. Agent took delivery and brought the goods to his godown after incurring expenses @ Re.1 per unit. Goods fully destroyed b fire in Agents godown-200 units (Insurance Co. admitted 80% of loss). Goods sold by Agent-7,300 units @ Rs.30

Required: Calculated the amount of closing stock and net loss incurred on goods destroyed by fire in Agents godown. ILLUSTRATION 10 (Valuation of Closing Stock when Goods are particularly damaged in transit) Mr X Ltd. Provides you the following information. 1. 2. 3. 4. 5. 6. 7. 8. 9. Good sent by Mr X to his agent Mr Y 10,000 Units @ Rs.20 per unit. Mr Xs Forwarding and Insurance Expenses Rs.50,000 Goods partially damaged-in-transit-200 units (Insurance Co. paid a claim to the extent of 40% of cost) Agent took delivery and brought the goods to his godown after incurring expenses @ Re 1 per unit. Expenses incurred on repairs of good partially damaged in transit to bring into saleable condition @ Rs.2 per unit. Goods sold by Agent-7,300 units @ Rs.30 Half of partially damaged goods were sold at half of selling price of normal goods Agents Commission-5% Balance of partially damaged goods were valued at 30% less than the cost. Required: Calculate the amount of Unsold stock and Net Loss incurred on Goods partially damaged in transit.

ILLUSTRATION 11 (Preparation of Goods damaged-in-transit A/c and Goods destroyed by Fire A/c) Mr X Ltd provides you the following: 1. Good sent by Mr X to his agent Mr Y-10,000 units @ Rs.20 per unit 2. Mr Xs Forwarding and Insurance Expenses Rs.50,000 3. Goods fully damaged in transit-200 units (Insurance Co. paid 80% of loss) 4. Goods partially damaged-in-transit-200 units. (Insurance Co. paid a claim to the extent of 40% of cost) 5. Agent took delivery and brought the goods to godown after incurring expenses @ Re 1 per unit. 6. Goods returned by Agent-100 units. 7. Goods fully destroyed by fire in Agents godown-200 units (Insurance Co. admitted 80% of loss). 8. Expenses incurred on repairs of goods partially damaged in transit to bring into 9. Goods sold by Agent-7,300 units @ Rs.30 10. Half of partially damaged goods were sold at half of selling price of normal goods 11. Agents Commission-5% 12. Balance of partially damaged good were valued at 30% less than the cost. 13. Owing to fall in market price, the value of normal stock is to be reduced by 10% Required: Calculate the amount of Closing Stock and prepare Goods damaged-in-transit A/c and Goods Destroyed by Fire A/c. 11.0 11.1 11.2 11.3 TREATMENT OF NORMAL LOSS Meaning Normal loss is an unavoidable loss due to inherent features of the goods (e.g.evaporatio, normal leakage/spoilage). Treatment It is treated as a part of cost by inflating the cost per unit. No Journal Entry No separate journal entry is passed to account for such loss. ILLUSTRATION 12 (Valuation of Closing Stock when there is Normal

Loss) 1. Goods sent by Mr X to his agent Mr Y-10,000 Units @ Rs.20 per unit. 2. Mr Xs forwarding and insurance expenses Rs.50,000 3. Agent took delivery and brought the goods to godown after incurring expenses @ Re 1 per unit. 4. Goods sold by Agent-7,300 units @ Rs.30 5. Goods lost in Agents godown due to normal causes-200 units. Required: Calculate the amount of Closing Stock. Treatment of Normal Loss In accounts, normal loss is adjusted by spreading over its cost proportionately to goods sold and unsold. ILLUSTRATION 13 (Valuation of closing stock when three are both the abnormal loss & normal loss) Calculate the value of unsold consignment stock and abnormal loss from the following information. (a) Goods consigned-10,000 units @ Rs.20 per unit. (b) Freight and Insurance expenses incurred by consignor-Rs.47,500 (c) Expenses incurred by consignee-Unloading charges Rs.4,900 clearing custom and octroi charges Rs.3,900, Carriage Inward Rs.1,000, Storage expenses Rs.1,450, Office & adm. Expenses Rs.5,000, Selling, and distribution expenses Rs.10,000, Bad debts Rs.1,625. (d) Goods sold by consignee 2500 units @ Rs.25 per unit for cash and 5000 units @ Rs.32.50 credit. (e) Rate of commission of consignor-5% (including 2% Del-credere) (f) 100 Units of goods sent were lost in transit. (g) 100 units goods are still in transit. (h) 100 units of goods lost by fire in consignees godown. (i) 100 units of goods lost in the godown of consignee due to inherent nature of goods. 12.0 DISTINCTION BETWEEN NORMAL LOSS AND ABNORMAL LOSS

IN CONSIGNMET Normal loss differs from Abnormal loss in the following respects: Basis of Distinction 1. Avoidable vs. Unavoidable 2. Causes Normal Loss It is an unavoidable loss. It is caused due to the inherent features of the goods e.g. evaporation, normal leakage/spoilage. It is treated as a part of cost. Normal Loss It is an avoidable loss. It is usually caused due to abnormal factors like fire, theft, abnormal spoilage/ pilferage etc. It is not treated as a part of cost.

3. Part of cost 4. Valuation Basis of Distinction 5. Treatment

Its value is not calculated Its value is calculated in the separately same manner as the value of unsold stock. Normal Loss Normal Loss Its value is adjusted by Its value is credited to the inflating the cost per unit as Consignment Account in under. order to calculate the normal Effective Cost per unit = profit/loss on Consignment. Total Cost ----------------------------Total Qty Normal Loss (in Qty.) No journal entry is passed to The following journal entry is account for such loss. passed to account for such a loss: P&L A/c Dr. (Irrecovered Loss) Insurance Co. Dr. (Claim admitted) To Consignment A/c (Total Loss)

6. Journal Entry

13.0

ACCOUNTING TREATMENT IN THE BOOKS OF CONSIGNOR

13.1

Object

of

Consignment

A/c

The

Consignor

prepares

Consignment Account relating to each Consignment in order to ascertain he profit or loss on each consignment. 13.2 13.3 Nature Consignment Account is a normal account like Trading and Profit & Loss Account. Debit Items - Consignment Account is debited with the cost of goods consigned, Expenses incurred by Consignor, Expenses incurred by Consignee Commission due to consignee. 13.4 Credit Item Consignment Account is credited with sale proceeds, abnormal loss, closing stock and the cost of goods returned by consignee. 13.5 Balance Excess of credit side total over debit side total is regarded as profit whereas excess of debit side total over credit side total is regarded as loss. 13.6 13.7 Closure Consignment Account is closed by transferring the profit or loss to the Profit & Loss Account. Journal Entries The various accounting entries which may be required to be passed in the books of Consignor are summarized below: I. When goods are sent at cost (a) On sending the Goods on Consignment Consignment A/c Dr. (With the cost of goods sent) To Goods sent on Consignment A/c (Being Goods sent on Consignment) Tutorial Notes (j) If consignments have been sent to more than one consignee, the consignment accounts may be distinguished by adding the names of the places to the Consignment Account. Account, etc.) (For example Consignment to Calcutta Account, Consignment to Bombay

(ii)

Consignee is not debited as a debtor at the time of sending goods to him since the goods have not been sold to him, merely possession has been transferred. consignee when he sells the goods. He becomes indebted to the

(b)

On incurrence of expenses by consignor Consignment A/c To Cash/Bank A/c. (Being the expenses incurred) Dr. (With the amount of expenses incurred by Consignor)

(c)

On receiving security from consignee Cash/Bank/Bills Receivable A/c To Consignees A/c Dr. (With the amount of security Received from Consignee)

(Being security received from Consignee) (d) On getting the bills receivable (received from consignee), discounted Bank A/c Discount A/c To Bills Receivable A/c (Being the B/R discounted with the bank @....% p.a.) (e) On receiving the goods returned by consignee Goods sent on Consignment A/c To Consignment A/c (Being the goods returned by the Consignee) (f) On incurrence of expenses by consignee Consignment A/c To Consignees A/c (g) On sales being made by consignee Consignees A/c Dr. (With the amount of sales made) Dr. (With the amount of expenses incurred by consignee) Dr. Dr. (With the amount of net proceeds) Dr. (With the amount of Discount)

(Being expenses incurred by Consignee)

To Consignment A/c (Being sales made by Consignee) (h) On making the commission due to consignee Consignment A/c To Consignees A/c (i) Dr. (With the amount of commission earned by consignee)

(Being the Commission due to Consignee) On charging bad debts if consignee is not entitled to del-credere Commission Consignment A/c To Consignees A/c (Being the bad debts charged) Dr. (With the amount of Bad Debts)

Tutorial Note If the consignee is entitled to del-credere commission, no entry for bad debts is to be passed since such loss is to be borne by the Consignee himself. (j) On receiving the balance due from the consignee Cash/Bank/Bills Receivable A/c To Consignees A/c (Being the balance debts charged) (k) On accounting for the unsold stock with the Consignee Consignment Stock A/c To Consignment A/c (Being unsold stock with the consignee brought into account) (l) On accounting for abnormal loss of goods (i) Profit & Loss A/c Insurance companys A/c Dr. With irrecovered loss) Dr. (With the claim admitted by insurance company) Dr. (With the value of unsold stock) Dr. (With the amount of balance)

To Consignment A/c (ii) Cash/Bank A/c

(With the total loss) Dr. (With the claim recovered)

(Being abnormal loss accounted for) To Insurance Co.s A/c (Being the claim received) (m) On accounting for profit/loss on consignment (i) In case of profit Consignment A/c To Profit & Loss A/c (Being the profit on Consignment transferred) (ii) In case of loss Profit & Loss A/c To Consignment A/c (Being the loss on Consignment transferred) (n) On transfer of goods sent on consignment account Goods sent on Consignment A/c To Trading A/c (Being the Goods Sent on Consignment A/c t/f to Trading A/c) (o) On transfer of discount account (raised on discounting a Bills Receivable received from consignee) Profit & Loss A/c To Discount A/c (Being the Discount A/c t/f to Profit & Loss A/c) II. When goods are sent at cost plus profit In such a case, the following four additional entries besides aforesaid entries, are required to be passed to eliminate loading (i.e. Excess of Invoice Price over Cost Price) (p) To eliminate the profit element included in goods sent on Consignment Goods sent on Consignment Dr. Dr. Dr. (With the amount of loss) Dr. (With the amount of profit)

A/c To Consignment A/c

Dr. (With the amount of profit included in goods sent)

(Being profit included in Goods sent @ Rs.eliminated) (q) To eliminate the profit element included in closing stock lying with the consignee. Consignment A/c Dr. (With the amount of profit included To Consignment Stock Reserve A/c in unsold closing stock) (Being profit included in unsold closing stock @ Rs.. eliminated) (r) To eliminate the profit element included in opening stock lying with the consignee. Consignment Stock Reserve A/c To Consignment Stock A/c Dr. (With the amount of profit included in unsold opening stock)

(Being profit included in unsold opening stock @ Rs eliminated) (s) To eliminate the profit element included in Goods returned by Consignee Consignment A/c Dr. (With the amount of profit To Goods sent on Consignment A/c included in goods returned) (Being profit included in Goods returned @ Rs eliminated) 13.8 Dr. Particulars
To Goods Sent on Consignment A/c To Bank A/c (Consignors Expenses) To Consignees A/c (Expenses) Unloading Expenses Landing & Clearing Transport upto godown Godown Rent .. .. .. .. ..

Format of Consignment Account and Consignees Account Consignment Account Rs.

Cr. Rs. .. ... ... ... ... ...

Particulars

Establishment Expenses Selling & Distribution Expenses Advertisement Expenses

.. ... ...

.. In .. By Goods sent on Consignment A/c Loading on Goods Sent) By Less t/f to P&L A/c transit

To Consignees A/c (Bad Debts) (where consignee does not get Del-credare Commission) To Consignees A/c (Common.) Normal Commission @ Del Credare Commission @ Over-riding Commission @ (Loading on closing stock) To Profit t/f to P&L A/c ... ...

To Consignment Stock Reserve A/c

...

*only one item will appear Dr. Particulars

Consignment Account Rs.

Cr. Rs. .. ... ... ... ... ... ...

Particulars
By Bills Receivable A/c By Consignment A/c (Exp) By Consignment A/c (Comm.) By Goods Damaged in Transit A/c (Commission on Sale of Damaged Goods) By Goods Damaged in Transit A/c (Cost of Repairs) By Bank A/c (Remittance)

By Balance c/d

14.0

ACCOUNTING TREATMENTIN THE BOOKS OF THE CONSIGNEE

The various accounting entries which may be required to be passed in the books of Consignee are summarized below. (a) On providing security to consignor Consignors A/c To Cash/Bank/Bills Payable A/c Dr. (With the amount of Security to consignor)

(Being the security provided to Consignor) (b) On incurring expenses on behalf of consignor Consignors A/c To Cash/Bank A/c Dr. (With the amount of expenses incurred)

(Being the expenses incurred on behalf of Consignor) (c) On sale of goods on behalf of consignor Cash A/c/Consignment Debtors A/c Dr. (With the amount of sales) To Consignors A/c (Being the goods sold on behalf of Consignor) (d) On receipt of payment from consignment debtors Cash/Bank A/c To Consignment Debtors A/c Dr. (With the amount collected from Consignment Debtors)

(Being the amount collected from Consignment Debtors) (e) On non-realization of any book debts (i) Because of dispute regarding quality, quantity, delivery etc. Consignors A/c To Consignment Debtors A/c (Being the debts not realized due to ) (ii) Because of insolvency of customer If Del-Credere commission is given Bad Debts A/c To Consignment Debtors A/c (f) On making the commission due from consignor Consignors A/c To Commission A/c Dr. (With the amount of commission due from consignor) Dr. Dr.

(Being the commission due from Consignor)

(g) On remitting the balance to consignor Consignors A/c To Cash/Bank A/c Dr. (With the amount of balance remitted to the consignor)

(Being the balance remitted to the consignor) (h) On transfer of commission account Commission A/c To Profit & Loss A/c (Being the Commission Account closed) (i) On transfer of bad debts account Profit & Loss A/c To Bad Debts A/c (Being the Bad Debts Account closed) (j) On discharging bills payable (if any accepted) Bills Payable A/c To Cash A/c/Bank A/c Dr. (With the amount of Bill Payable discharged) Dr. Dr.

(Being the Bills Payable discharged) Tutorial Note No entry is passed in the books of Consignee to account for (i) receipt of goods from Consignor (ii) Expenses incurred by Consignor (iii) Abnormal loss/Normal loss in his godown or in transit (iv) Bill Receivables Discounted by the Consignor (v) Return of goods by Consignee (vi) Unsold Stock lying with him. ILLUSTRATION 14 (When goods are consigned at cost price) A of Agra, who entered into some consignment transactions with B of Barelli, provides you the following information. (a) Goods consigned-10,000 units @ Rs.20 per unit on 1.1.20x2 (b) Expenses incurred by the consignor towards loading freight, insurance, etc., Rs.47,500.

(c) A drew a bill on B for Rs.50,000 payable on 30 th June which B accepted. The bill was discounted by A with his bankers on 31 st Jan. at 18 per cent p.a. (d) Expenses incurred by the consignee-Unloading charges Rs.4,900, Clearing charges Rs.3,9000, Carriage Inward Rs.1,000, Storage Rs.1,450, Office & Adm. Expenses Rs.5,000, Selling & Distribution Expenses Rs.10,000. (e) Goods sold by the consignee-2500 units @ Rs.25 per unit for cash, 5,000 units @ Rs.32.50 per unit on credit. Consignee collected full payment from all credit customers except one to whom 200 units were sold became insolvent and paid only 75 paise in a rupee. (f) B remitted the amount due to A after deducting his 5% commission (including 2% del-credere commission) on 31 st Jan. 20x2. Required: (i) Pass necessary journal entries in the books of A & B and (ii) Prepare necessary ledger accounts in the books of A and B assuming that consignee is not required to maintain proportionate security with the consignor for the unsold stock. ILLUSTRATION 16 (When Goods are consigned at Cost and Goods are lost) Taking the same information as given in Illustration 14 along with the following information, prepare Consignment Account, Loss in transit Account and Loss due to Fire Account and Trading and Profit & Loss Account. Consignee also reported that--(a) (b) (c) (d) 100 units of goods are still in transit, 100 units of goods sent were lost in transit and Insurance Co. had admitted to pay Rs.1,800 in full settlement of the claim. 100 units of goods lost by fire in his godown, and Insurance Co. had admitted to pay Rs.1,800 in full settlement. 100 units of goods lost in his godown due to inherent nature of goods.

ILLUSTRATION 17 (When Goods are consigned at Invoice price) A of Agra, who entered into some consignment transactions with B of Barelli, provides you the following information. (a) Goods consigned-10,000 units @ Rs.25 per unit on 1.1.20x2. proforma invoice was made by adding 25% to cost. (b) Expenses incurred by the consignor towards loading, freight, insurance etc.-Rs.47,500. (c) A drew a bill on B for Rs.50,000 payable on 30 th June which B accepted. The bill was discounted by A with his bankers on 31 st Jan. at 18 percent p.a. (d) Expenses incurred by the consignee, Unloading charges Rs.4,900, Clearing charges Rs.3,900, Carriage Inwards Rs.1,000, Storage Expenses Rs.1,450, Office & Adm. Expenses Rs.5,000, Selling & Distribution Expenses Rs.10,000. (e) Goods sold by the consignee-2500 units @ Rs.25 per unit for cash, 5,000 units @ Rs.32.50 per unit on credit. Consignee collected full payments from all credit customers except one to whom 200 units were sold became insolvent and paid only 75 paise in a rupee. (f) B remitted the amount due to A after deducting his 5% commission (including 2% del-credere commission) on 31 st Jan. 20x2. Required: Prepare the Consignment to Barelli Account in the books of A. ILLUSTRATION 18 (When Goods are consigned at Invoice price and goods are lost) taking the same information as given in Illustration 17, along with the following information prepare Consignment Account, Loss-in-transit Account and Loss due to Fire Account. Consignee also reported that ---The

(a) 100 units of goods are still-in-transit; (b) 100 units of goods sent were lost in transit and Insurance Co. had admitted to pay Rs.1,800 in full settlement of the claim. (c) 100 units goods lost by fire in his godown and Insurance Co. had admitted to pay Rs.1,800 in full settlement of the claim. (d) 100 units of goods lost in his godown due to inherent nature of goods. ILLUSTRATION 19 Mr A and Mr B entered into an agreement whereby Mr A was to purchase second hand cars from Mumbai and sent the same to Mr B of Delhi who was to sell after reconditioning. 1. Mr A purchased 102 cars-50% @ Rs.30,000 and the balance @ Rs.38,000. 2. Mr A paid freight & insurance charges of Rs.1,02,000 on sending the cars to Mr B. 3. Mr A immediately drew upon Mr B a bill of Rs.10,00,000 for 3 months. The acceptance was discounted @ 18% p.a. 4. During transit two cars met with an accident and the insurance company paid the actual cost less 10% as claim amount to Mr A. 5. Mr B reconditioned the cars by spending the following amounts: Air-conditioning (10 cars) Labour, paint and other expenses Rs. 3,00,000 Rs.15,00,000

6. During testing, one non-A/C car met with an accident and the insurance company paid the actual cost less 10% as claim amount to Mr B. 7. Mr B sold the cars as follows: 9 A.C. Cars at a profit of 100% on cost. 81 Non-A.C. cars at a profit of 60% on sales. One customer to whom one AC Car was sold became insolvent and paid only 50%

8. Mr B retained one non-AC car for his personal use which was priced at actual cost. 9. Mr B was entitled to 5% commission on sales. 10. Mr B sent a Bank Draft for the balance.