CONSIGNMENT ACCOUNTS

Consignment—What is it?
Quite often it happens that a manufacturer or a wholesale dealer who does
not find ready market in his own place becomes desirous of seeking a good
market elsewhere. Even when there is a good market for his goods in his
own place, he is often anxious to make his goods popular elsewhere. For this
purpose the merchant employs a leading dealer at the place where he wants
to push his goods to act as his agent and sell goods on his behalf and risk
as agent on commission. Goods so sent to a person are known as
Consignment. The person who sends such goods is known as the Consignor
and the person to whom the goods are sent is known as the consignee. Such
goods sent to the Consignee remain the property of the Consignor. The
Consignee to whom the goods are sent does not buy them, but, merely
undertakes to sell them on behalf of the consignor. He is not responsible for
any loss or damage to the goods, if such loss or damage is caused for no
fault of the Consignee.
Such a shipment of the goods by the Consignor cannot be treated as ordinary
sale and such transactions require special treatment in the books of
accounts.
Difference between a Sale and a Consignment
1. When goods are sold by one to another, the property in the goods
immediately passes to the buyer, whereas when goods are sent on
Consignment, the property in the goods remains with the consignor. Only
the possession is transferred to the consignee.
2. When goods are sold by one to another, it becomes a relationship of a
buyer and seller or a Debtor and a Creditor between the two persons,
whereas when goods are Consigned by one to another, it becomes a
relationship of a Principal and an Agent between the Consignor and the
Consignee.
3. When goods are sold, the buyer cannot return the goods to the seller
whereas when goods are sent on Consignment the goods are returnable, if
they remain unsold.
4. The risk in the goods is not transferred to the consignee despite the
transfer of possession of goods. Any damage or loss to the goods is therefore
borne by consignor. But in the case of sale, the risk is immediately
transferred to the buyer even when the goods are still in the possession of
the seller.
5. The expenses, in respect of freight, cartage, insurance, etc. are met by
the consignor in a consignment transaction, but in the case of sale the
expense are borne by the purchaser unless otherwise provided in the
agreement.
6. The transfer of possession (i.e. delivery of goods) is essential in a
consignment transaction. In a sale, however, the goods may be delivered at
a later date.
The consignee will be treated as a debtor only when goods or part of them
have been sold by him. But if goods remain unsold, the consignee will send
them back to the Consignor and the Consignor will pay the Consignee all the
expenses he has incurred in keeping the goods in safety and in attempting to
push the goods in the market.
Commission or Consignee's Remuneration
When the goods are sold by the consignee, he is paid a commission for his
services at a fixed rate on the proceeds of the goods sold by him. In addition
to this commission, he is to be reimbursed for all expenses incurred by him
in connection with the consignment sales. Usually these expenses are in the
nature of dock charges, custom duties, carriage, godown rent,
advertisement, insurance of the goods while in his possession etc.
Del Credere Commission. Usually the consignor advises the
consignee to sell the goods consigned to him for cash only, because
if such goods are sold on credit by the consignee and if any amount
becomes irrecoverable from the debtors the loss will fall upon the
consignor. As the consignee acted as an agent only in effecting the
sales, he does not become responsible for any debts. But
sometimes an arrangement is made between the consignor and the
consignee whereby the later guarantees payment and undertakes
responsibility for bad debts. For this the consignee receives an
additional commission known as ``Del Credere Commission'' on the
total sales. When del-credere commission is given to the consignee,
the consignee will make payment to the consignor, whether he
himself receives the payment or not from the purchaser(s).
Over-riding Commission : This type of commission is allowed to
the consignee in addition to the normal commission (as distinct
from Del credere commission). The idea seems to be to provide
addition incentive to the consignee for the purpose of creating
market for new products.
Proforma Invoice :
When goods are despatched, the consignor makes out a `Pro-Forma Invoice'
giving indication of the price of the goods at which the consignee ought to
sell the goods. Pro-Forma Invoice is a statement which is similar to that of
an invoice, but it is called proforma because it does not make the consignee
responsible to pay the amount named therein.
The consignor generally mentions a higher price than his cost so that
consignee does not know the profit of the consignor.
Advance against Consignment :
Until the goods are sold by the consignee, he is not indebted to the
consignor and is not expected to pay for them. This results in a part of the
consignor's Capital being locked up for a period. To overcome his difficulty,
the consignee often remits a sum of money in advance to the consignor. This
may be done in the form of an acceptance of a Bill of Exchange drawn by
the consignor on the Consignee or a simple bank draft. An advance is readily
sent against consignment by the consignee to the consignor when the
consignment goods have become popular in the consignee's place.
Account Sales :
Periodically, the consignee will send statements of sales and expenses
incurred, commission earned and the consequent amount due to the
consignor. Such a statement is made in a form known as ``Account Sales''.
An Account Sales may be defined as a ``statement prepared and sent by the
consignee to the consignor at periodical travels, say three months or six
moths detailing therein the goods payable and the net amount due from the
consignee after deducting the advances, if any, paid already.''

Consignor’s Journal Consignee’s journal

1.When Goods sent for consignment
Consignment account No entry because of no transfer of ownership
Goods sent for Consignment
2.Expenses incurred by Consignor
Consignment account No entry because these are incurred by
Bank account consignor
3.Advance against Consignment
Cash account Consignor account
Consignee account Cash account
4.Expenses incurred by Consignee
Consignment account Consignor accent
Consignee account Cash account
5.sales of goods
Consignee account Cash account
Consignment account Consignor account
6.Commission paid by consignor
Consignment account Consignor account
Consignee account Commission account
Be careful. And remember.
Here stop and make consignment account from journal of consignor. And get profit or loss Proceed
if profit then profit and loss is credited and if loss then profit and loss is debited.
7.For profit

Consignment account No entry because he has no concern with profit

Profit and loss account

8.Clsoing of consignment

Good sent for consignment account No entry because he has no concern with profit

Trading account

Unsold Stock of Consignment Goods : Its Valuation :

If a part of the goods sent to the Consignee has remained unsold, the unsold
stock with the Consignee must be valued and brought into the books before
profit or loss can be ascertained. This unsold stock is valued at cost price or
market price, whichever is lower of the two. The cost price here should
not mean merely the cost at which the goods were invoiced but
should include such proportionate expenses as normally increase
the value of the goods consigned. Such expenses are freight, custom
duties, dock dues, insurance-in-transit, loading and unloading charges, etc.
It does not matter whether these expenses are paid by the Consignor himself
or by the Consignee. But the expenses incurred by the Consignee in
effecting sales, such as advertisement, travellers commission, storage,
insurance against fire or theft, are not included in determining the cost
price of the unsold stock. In other words it can be said that all direct
expense or all expenses made whether by the consignor or by the consignee
in placing the goods in a saleable condition (all expenses till the goods reach
the godown of the consignee) will be taken into account while valuing the
closing stock.
Loss of Stock
In case the goods sent on consignment are lost or damaged in transit or
otherwise, the loss is that of the consignor and not of the consignee.
Accordingly the consignor will have to make the entries for such loss. There
may be two types of losses viz. Normal loss and Abnormal loss.
1. Normal Loss:—Normal loss is natural, unavoidable and inherent
in the nature of goods or commodities or articles sent on
consignment. This type of loss is a part of the cost of the
consignment, so the consignor does not make separate entry for
such a loss. However, the normal loss has to be taken into
consideration while valuaing the unsold consignment stock in the
hand of the consigne.
The accounting treatment of normal loss is to charge the total cost of the
goods to the remaining goods after the normal loss. In other words, the
value of the unsold stock is calculated in proportion to the total cost of the
goods consigned.
Value of unsold stock = (Total cost of the goods sent/Total
quantity sent-quantity of normal loss)x unsold quantity
2. Abnormal loss:- It arises due to abnormal factors or
circumstances such as fire, theft Pilferage, sabotage etc. In case of
abnormal loss the price is not inflated at all. This loss is calculated y
adding proportionate direct expenses incurred by the consignor and
the consignee as the case may be to the original cost of the goods.
The accounting Entry is :
Debit Abnormal Loss A/c
Credit Consignment A/c
In case the stock is insured, the amount of claim admitted by the insurance
company should be reduced from the Abnormal loss and only the net loss
amount should be debited to Abnormal loss or P&L A/c.
The entry will be :
 Debit : Insurance Company A/c (with the amount of claim admitted)
Debit : Profit and Loss (Abnormal Loss A/c) (with the amount of loss)
Credit: Consignment A/c (with the amount of Total Abnormal loss)
The procedure for calculating the Abnormal loss and the valuation of the
remaining stock is summarised as under :
(i) Calculation of Abnormal loss :
Add Cost of goods Lost
Proportionate Expenses of the goods lost
(ii) Valuation of Closing Stock
(1) Cost of the goods _ (Closing Stock/Total goods consigned )× Cost
of total goods consigned
Add. Proportionate Non-recurring (direct) expenses incurred
before the loss _
(Closing Stock/Total goods consigned )× Expenses incurred
before the loss
Add: Proportionate expenses (Direct only)
incurred after the loss : quantity unsoid/(Total quantity sent-
goods Lost)× Expenses incurred after the loss.