CONSIGNMENT ACCOUNTS

1. What is a consignment?
A consignment is sending of goods by the owner to his agent to be sold on behalf of
and at the risk of the owner in return for a fixed rate of commission on the gross sale
proceeds.
The person who sends the goods is called principal or consignor and the person to
whom goods are sent is called agent or consignee.
2. What are the features of a consignment transaction?
The main features of a consignment transaction are as follows:
i) Consignment of goods is a mere transfer of possession of goods from one
person to another for the purpose of rate but it is not a sale.
ii) The relationship between the consignor and the consignee is that of principal
and an agent.
iii) The ownership in the goods does not pass on to the consignee
iv) Consignee sells the goods on behalf of and at the risk of consignor.
v) Consignee gets fixed rate of commission on gross sales for his service.
. What are the !ifferences "et#een a consignment an! a sa$e %An& four'
The difference between consignment and sale are as follows:
(oints Consignment Sa$es
1. wnership
!. "elivery of goods
#. $isk
%. $elationship
&. 'tatement of
account
(. $eturn of goods
). Commission
*. +overning Act.
wnership of goods consigned
remains with the consignor
Consignee gets actual delivery
of goods
$isk connected with the goods
remains with the consignor
The relationship between
consignor and consignee is a
principal and an agent.
Consignee has to send account
sales statement to consignor
Consignee can return unsold
goods to the consignor
Consignor gives commission
to the consignee
,ndian Contract Act- 1*)!
wnership of goods sold
passes from seller to buyer
+oods may or may not be
delivered to buyer
$isk goes to the buyer
The relationship is buyer
and seller or debtor and
creditor
.uyer need not send any
such statement.
.uyer cannot return.
'eller does not give any
such commission to the
buyer
The sale of +oods Act-
1/#0
). E*+$ain the fo$$o#ing,
a) Consignment utward
b) Consignment ,nward
1hen the consignor sends the goods to consignee- from the point of view of
consignor- the consignment of goods is called consignment outward. The consigned
goods remain legal property of the consignor until they are sold.
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1hen consigned goods are received by the consignee to be sold on behalf of and at
the risk of his principal- the consignee considers the consignment as consignment inward.
-. What is a +ro.forma in/oice?
4ro5forma invoice is a statement prepared and sent by the consignor to the consignee
containing the details of goods sent. ,t contains particulars of 6uantity- 6uality and price
of goods sent and also special instructions for selling the goods.
,t is called pro5forma invoice because it does not make the consignee responsible
to pay the amount stated there in.
0. What is an account sa$e?
,t is a statement prepared by the consignee either on completion of sales or at
periodical intervals. This statement gives particulars of:
i) +ross sales
ii) 7xpenses incurred
iii) Commission due
iv) Advance paid
v) 8et amount due from the consignee to the consignor.
1. What are the !ifferences "et#een +ro.forma in/oice an! account sa$es?
The differences between pro5forma invoice and account sales are as follows:
(oints (ro.forma In/oice Account sa$es
1. 4reparation
!.,nformation
#.$esponsibility of
payment
%. 1hen it is sent
,t is prepared and sent by the
consignor to the consignee.
+ives particulars of goods sent
,t does not make the consignee
responsible to pay the amount
stated there in.
,t is sent only once along with the
goods
,t is prepared and sent by
the consignee
+ives particulars of goods
sold
,t makes the consignee
responsible to pay.
,t is sent at periodical
intervals.
2. What are !ifferent t&+es of commissions?
,n consignment transaction consignee may receive the following types of
commissions:
i) Or!inar& Commission, ,t is the remuneration paid by the consignor to the
consignee for his service. ,t is calculated at an agreed percentage on the total sale
ii) 3e$.cre!ere Commission, ,t is a special commission paid by the consignor to
the consignee for taking extra risk i.e. risk of bad debt. This commission is
calculated either on the gross sales or on the credit sales. 9,n the absence of
information it is calculated on the gross sales)
iii) O/er.ri!ing Commission: ,t is a special commission allowed by the consignor to
the consignee over and above the ordinary commission. This commission is
allowed with an ob:ect to sell goods at a higher price. ,t is an extra incentive to the
consignee usually allowed if the total sales exceed a specified target. ,t may be
calculated on the total sales or on the excess of total sales over the invoice price.
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4. What !o &ou mean "& recurring e*+enses?
$ecurring expenses are those indirect expenses- which are incurred after the goods
have reached the place of consignee. 7xamples of recurring expenses are:
i) +odown rent
ii) +odown insurance
iii) Commission
iv) Advertisement
v) 'alesman;s salaries.
4. What !o &ou mean "& non. recurring e*+enses?
8on5recurring expenses are those expenses- which are incurred from the time of
goods sent by the consignor till the time goods reach the business premises of the
consignee. As such expenses normally increase the value of goods- a proportionate part of
such expenses must be added while valuing consignment stock. 7xamples of non5
recurring expenses are:
i) <oading charges
ii) =reight
iii) 4acking charges
iv) ,nsurance
v) >nloading charges
vi) ctroi
vii) Carriage- cartage- etc.
viii) Custom duty- import duty- etc.
15. What are the !ifferences "et#een Or!inar& commission an! 3e$.cre!ere
commission?
The important differences are:
rdinary commission is allowed to the consignee as remuneration for his service.
"el5credere commission is allowed to the consignee when he undertakes the risk
of bad debt.
rdinary commission is paid at an agreed rate on the total sales.
"el5credere commission is paid at an agreed rate either on total sales or credit
sales
,n return of this ordinary commission- consignee guarantees only the proceeds of
cash sales.
,n return of del5credere commission consignee guarantees the proceeds of cash
and credit sales.
11. What are the !ifferences "et#een !e$.cre!ere commission an! o/er.ri!ing
commission?
The important differences are
4oints "el5credere commission ver5riding commission
1. b:ect ,t is allowed to the consignee when
he has undertaken risk of bad debt.
,t is allowed to the
consignee when he sells
goods at a higher price.
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!. +uarantee
#.Calculation of
Commission
Consignee guarantees the proceeds
of consignment sale
,t is calculated at an agreed rate
either on total sales or credit sales
,n return of this
commission- consignee
does not give any
guarantee
"epending upon the terms
it may be calculated on
total sales or on excess of
total sales over invoice
price.
12. Name an! e*+$ain the im+ortant accounts o+ene! in the "oo6s of consignor.
,mportant accounts- which are opened in the books of consignor- are:
i) Consignment Account. ,n order to find out profit or loss on consignment- the
consignor keeps a separate account called Consignment Account.
Consignment Account is the nominal account :ust like Trading Account. This
account is debited with the amount of goods sent- expenses incurred on
consignment by the consignor as well as consignee and credited with amount
of sale and the value of stock with consignee at the end. ,f the debit side of the
consignment Account exceeds the credit side- the result is loss: when the
credit side is more- the result shall be profit. The profit or loss on consignment
is transferred to the 4rofit and <oss Account.
ii) Consignee7s Account: ,t is a personal account. ,t is prepared to find out the
amount due by the consignee. This account is debited with gross sale proceeds
and credited with expenses incurred by consignee commission due to him and
advance received from consignee.
iii) Stoc6 on Consignment Account, ,t is a real account. ,t is debited with the
value of unsold goods lying with the consignee at the end of the year. The
balance of the consignment Account will be shown on the asset side of the
balance sheet.
iv) Goo!s sent on Consignment Account: ,t is a real account. 1hen goods are
sent on consignment- it is credited and when consignee returns goods- it is
debited. The balance of this account is transferred to the Trading Account.
1. 8o# is consignment stoc6 at the en! /a$ue!?
The following rules are applied for unsold stock valuation:
i) Consignment stock is valued at cost price or market price which ever is lower
ii) =or calculating cost price- proportionate direct expense is added to cost.
,n other words- it is calculated as follows:
Cost of unsold goods with consignee $s???
Add: 4roportionate non5recurring expenses of consignor $s???
Add: 4roportionate non5recurring expenses of consignee $s???
Cost of unso$! stoc6 9s::.
8ote: ,f the details regarding nature of expenses are not mentioned in the 6uestion- it
is advisable that- the proportionate expense incurred by the consignor only taken into
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account for valuing consignment stock and the expenses incurred by the consignee
should be ignored.
1). 8o# is !iscounting charges on "i$$ treate!?
1hen the bill is discounted it is dealt with in two ways. They are:
i) @ay be considered as financial expense of the business and charged to the
4rofit A <oss Account:
ii) @ay be regarded as consignment expense and debited to Consignment
Account.
1-. Gi/e the formu$a for ca$cu$ating the /a$ue of unso$! stoc6.
9Cost price of articles sent B 8on recurring expenses) C
10. Gi/e e*am+$es of recurring an! non.recurring e*+enses,
$ecurring expenses are:
+odown rent A insurance- delivery charges- salesman;s salary- advertisement-
commission- etc.
8on5$ecurring expenses are:
=reight- carriage- cartage- insurance of goods- export and import duty- loading or
unloading charges- dock dues- etc.
11. What !o &ou mean "& $oa!ing on consignment?
>sually goods are sent at their cost price sometimes in order to conceal from the
consignee the real profit made by the consignor- the consignor sends goods above
their cost price by adding to the cost some profit calculated as a percentage of cost or
sales. This procedure is known as consignment loading.
The difference between the pro5forma invoice price and cost price is called loading
price.
<oading price D 4ro5forma invoice price minus cost price of goods.
12. What are the a!/antages of consignment on $oa!ing?
The important advantages are:
i) The consignee shall never come to know the real profit of the consignor.
ii) Consignor shall not ask higher commission
iii) 7nsures higher profit.
14. What !o &ou mean "& norma$ $oss?
The loss- which is natural- unavoidable- and inherent nature of goods sent on
consignment- is called normal loss.
8ormal loss arises due to natural causes like evaporation- leakage- drying etc. Theese
losses are likely to occur in spite of best possible care and caution.
25. 8o# is norma$ $oss treate!?
8ormal loss is a part of the cost of goods sent and hence no separate ad:ustment is
made for such less. .ut at the time of calculating the value of unsold stock- the
6uantity of such loss is deducted from the total 6uantity sent by the consignor.
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Articles unsold
Articles sent.
21. What !o &ou mean "& a"norma$ $oss?
The loss- which arises due to abnormal causes such as fire- flood- theft- accident- etc.
is called abnormal loss. Abnormal loss is calculated in the same manner as the value
of unsold stock on consignment.
8ote: 1hile calculating the loss- proportionate value of non5recurring expense prior
to loss is added to the cost price of abnormal loss.
22. Gi/e accounting entries for recor!ing a"norma$ $oss.
S$.No. (articu$ars Amount
1.
!.
#.
=or abnormal loss:
Abnormal loss Account "r.
To consignment Account.
=or the loss recovered from the insurance company:
.ank Account "r.
To Abnormal loss Account.
=or the transfer of balance in Abnormal loss Account:
4rofit A <oss Account "r.
To Abnormal loss Account.

2. What !o &ou mean "& stoc6 9eser/e Account?
1henever goods are sent at their invoice price- consignment stock is calculated
accordingly and shown on the credit side of the consignment Account. Then the
difference between the closing stock at invoice price and at cost price is transferred at
a separate account called 'tock $eserve Account- 'hown on the consignment Account
debit side.
2). What are the !ifferences "et#een norma$ $oss an! a"norma$ $oss in
consignment?
The differences between two are summariEed as follows:
'l. 8o 4oints 8ormal <oss Abnormal <oss
1 Causes ,t is caused due to normal causes
like evaporation- leakage- driage-
spoilage- etc.
,t is usually caused
by fire- theft-
pilferage- etc.
! 4art of cost ,t is considered as part of cost ,t is not considered
as apart of cost
# Faluation ,ts valuation is not done
separately
,ts valuation is done
separately
% 7ntry 8o entry is re6uired in The 7ntry is re6uired in
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books the books
& 8ature ,t is unavoidable loss ,t is avoidable loss
2-. Wh& is consignee not treate! as a consignor7s !e"tor?
Consignee is not treated as consignor;s debtor becauseG mere receipt of goods does not
make consignee a debtor of the consignor. He becomes indebted to the consignor when
he sells goods and realiEes money. =urther the relationship between consignor and
consignee is that of principal and agent and not seller and buyer.
20. What are the o";ecti/es of consignment?
The ob:ectives of consignment are:
9i) To get the advantage of difference in price.
9ii) To enter into the new market.
9iii) To bridge the gap between buyer and seller.
21. 8o# !oes +ro.forma in/oice !iffer from an in/oice?
A sales invoice charges the buyer with the value of goods but pro5forma cannot charge
the consignee for the value of goods.
22. 8o# is !istinction "et#een recurring an! non.recurring e*+enses re$e/ant in
consignment account?
This distinction is important because while valuing unsold stock only the proportionate
value of non5recurring expenses are added to the cost price.
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