Accounting for Consignment – tryspring

By | October 24, 2019

Accounting for Consignment

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

Meaning and Features of Consignment

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

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

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

  • Since ownership of goods remain with the manufacturer
    (consignor), consignee (agent) is not responsible for any
    loss or destruction of goods.

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

  • Consignee only gets re-imbursement of expenses incurred by
    him and commission on sale made by him, because sale that
    proceeds, belongs to owner (consignor).

Why is Consignment not a Sale?

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

  • Ownership − Ownership of goods need to be transferred
    from seller to buyer in case of sale, but ownership of goods
    remains with the consignor, till the goods are sold by the
    consignee.

  • Risk − In case of a consignment, normally, risk
    remains with the consignor in the event of goods being lost
    or destroyed.

  • Relationship − The relation between a seller and a
    buyer will be of debtor and creditor in case where goods are
    sold on credit basis. On the other hand, the relationship
    between a consignor and a consignee is that of principal and
    agent.

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

Important Terms

Pro-forma Invoice

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

Account Sale

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

Commission

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

  • Simple Commission − This is usually a fixed percentage
    on the total sale, calculated as per mutually agreed terms.

  • Over-riding Commission − In case of an extra-ordinary
    sale of the goods, some specific amount is payable to
    consignee in the form of an incentive is called overriding
    commission. Over-riding commission is also calculated on the
    total sales.

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

    C. & G. Merriam Co.

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

Direct Expenses

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

Indirect Expenses

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

Advance

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

Valuation of unsold Consignment

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

  • Proportionate cost price and
  • Proportionate direct expenses.

Here, proportionate direct expenses mean — all expenses incurred
by the consignor and the expenses of consignee, which are
incurred by him till the goods reach the warehouse.

Invoicing Goods higher than Cost

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

  • To hide actual profit from consignee.

  • Valuation of a stock at the consignor’s warehouse is
    comparatively easy in this case.

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

Loss of Goods

There may be two types of losses as explained below −

Normal Loss − Normal loss may occur due to inherent
characteristics of goods like evaporation, drying up of goods,
etc. It is not separately shown in the consignment account, but
included in the cost of goods sold and the closing stock by
inflating the rate per unit. To calculate the value of unsold
stock, following formula is used.

$$small Value:of:closing:stock =
frac{Total:value:of:goods:sent}{Net:quantity:received:by:consignee}
times Unsold:quantity$$

$$small Net:quantity:received = Goods:consigned:quantity –
Normal:loss:quantity$$

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

Abnormal Loss and Insurance

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

Sr.No. In the Books of Consignor In the Books of Consignee
1

Payment of Insurance Premium

(a) If insurance premium is paid by the consignor,
then cash will be credited.

(b) If Insurance premium is paid by the consignee,
then consignee’s A/c will be credited.

Consignment A/cDr

To Cash A/c

Or

To Consignee A/c

(Being Insurance premium paid)

2

At the time of Abnormal Loss

Abnormal Loss A/cDr

To Consignment A/c

(Being Loss Incurred)

3

Acceptance of Claim by Insurance Company

Insurance Company (Name of the insurer) A/cDr

To Abnormal Loss A/c

(Being claim admitted)

4

On receipt of Claim

Bank A/cDr

To Insurance Company A/c

(Being amount of claim received)

5

In Case of Loss

Profit & Loss A/cDr

To Abnormal Loss A/c

(Being amount of Abnormal Loss transferred)

Summary of Accounting Entries

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

Sr.No. In the Books of Consignor In the Books of Consignee
1

When goods are sent to the consignee

Consignment A/cDr

To Goods Sent on Consignment A/c

(Being Goods Sent on Consignment)

No need to do any Entry in this case
2

Expenses Incurred by Consignor

Consignment A/cDr

To Cash/Bank A/c

(Being Expenses incurred on consignment)

Not Applicable
3

Advance given by consignee

Cash/Bank A/cDr

To Consignee’s A/c

(Being advance received from consignee)

Consigner A/cDr

To Bank/Cash A/c

(Being Advance amount paid to Consignor)

4

Expenses Incurred by Consignee

Consignment A/cDr

To Consignee’s A/c

(Being Expenses incurred by consignee)

Consigner A/cDr

To Bank/Cash A/c

(Being Expenses incurred on goods received on consignment)

5

Sale by Consignee

Consignee’s A/cDr

To Consignment A/c

(Being Expenses incurred by consignee)

Cash (for cash sale) A/cDr

Debtors (for Credit Sale) A/c Dr

To Consignor A/c

(Being goods sold)

6

Commission to Consignee

Consignment A/cDr

To Consignee’s A/c

(Being Commission on sale due to consignee)

Consigner A/cDr

To Commission A/c

(Being Commission earned)

7

Remittance from Consignee

Cash/Bank A/cDr

To Consignee’s A/c

(Being due amount received from consignee)

Consigner A/cDr

To Bank/Cash A/c

(Being Balance due Payment made to consignor)

8

Entry for Profit on Consignment

Profit & Loss A/cDr

To Consignment A/c

(Being Profit earned on consignment)

Not Applicable

9

Loss on Consignment

Consignment A/cDr

To Profit & Loss A/c

(Being Loss incurred on Consignment transferred to the
profit & Loss Account)

Not Applicable

Note − The goods sent on consignment account will be
closed by transferring balance into the Purchase account or the
Trading account.

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