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 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.
Features of Consignment:
Consignment is method or arrangement in which the seller does not sell goods directly
to the buyer rather the seller gives goods to another party called consignee who in
turn sells to the buyer and consignee receives the commission on the sales. The
features of consignment are as follows:

1. The first and foremost feature of a consignment is that there is no direct contact
between the buyer and seller of the good and it is the consignee who is a link
between buyer and the seller.

2. Another feature of consignment is that the ownership of the goods remain with
the seller only and not with the consignee and all the risk associated with regards
any loss of the goods remain with the seller only.

3. In the case of consignment, all expenses with respect to sales of goods and
also taking goods from consignor place to consignee place is to be paid by
the seller of the good and not the consignee.

4. In the case of consignment, consignee gets fees or commission on the total

value of goods sold by him or her whereas the profit or loss arising on
consignment sale belongs to the seller only.

5. In the case of consignment, the unsold stock will be the closing stock of the
consignor and not the consignee because in the case of consignment only
possession of goods is transferred and not the ownership of goods.

6. In the case of consignment, consignee can return goods anytime he or she

wants to the consignor of goods which is not the case with normal sales
transactions where the buyer cannot return goods to the seller that easily.

7. Since ownership of goods remain with the manufacturer (consignor), consignee

(agent) is not responsible for any loss or destruction of goods.
8. The goods are sold on owner’s risk and hence, profit/loss goes to owner.
9. 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).
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Dr. S. Santha Kumari., M.Com., MBA., M.Phil., AP-SET., Ph.D., Asst. Professor, Commerce Dept., K L University, Guntur
Differences between consignment and 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.

Comparison Chart

BASIS FOR
CONSIGNMENT SALE
COMPARISON
Meaning When the goods are delivered to the A transaction in which goods
agent by the owner for selling are exchanged for a price is
purposes, is known as known as a sale.
Consignment.
Parties Consignor and Consignee Seller and Buyer
Relationship Principal and Agent Creditor and Debtor
between parties
Possession and Possession is transferred, but Both are transferred with the
Ownership ownership is not transferred, until transfer of goods.
they are sold to the final consumer.
Returning back The consignee can return the The buyer cannot return the
of goods unsold stock to the consignor. goods to the seller until and
unless the seller agrees to the
same.
Risk of loss Borne by consignor Borne by buyer
Expenses Met by consignor Met by buyer
incurred
Consideration Commission to the agent. Profit to the seller.

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Dr. S. Santha Kumari., M.Com., MBA., M.Phil., AP-SET., Ph.D., Asst. Professor, Commerce Dept., K L University, Guntur
 PROCESS OF CONSIGNMENT

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 − 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.

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Dr. S. Santha Kumari., M.Com., MBA., M.Phil., AP-SET., Ph.D., Asst. Professor, Commerce Dept., K L University, Guntur
  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.

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Dr. S. Santha Kumari., M.Com., MBA., M.Phil., AP-SET., Ph.D., Asst. Professor, Commerce Dept., K L University, Guntur
  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/c Dr
No need to do any Entry in this case
To Goods Sent on Consignment A/c
(Being Goods Sent on Consignment)
2 Expenses Incurred by Consignor
Consignment A/c Dr
To Cash/Bank A/c Not Applicable
(Being Expenses incurred on
consignment)
3 Advance given by consignee Consignor A/c Dr
Cash/Bank A/c Dr To Bank/Cash A/c
To Consignee’s A/c (Being Advance amount paid to
(Being advance received from consignee) Consignor)
4 Expenses Incurred by Consignee Consigner A/c Dr
Consignment A/c Dr To Bank/Cash A/c
To Consignee’s A/c (Being Expenses incurred on goods
(Being Expenses incurred by consignee) received on consignment)
5 Sale by Consignee Cash (for cash sale) A/c Dr
Consignee’s A/c Dr Debtors (for Credit Sale) A/c Dr
To Consignment A/c To Consignor A/c
(Being Expenses incurred by consignee) (Being goods sold)
6 Commission to Consignee
Consignment A/c Dr Consigner A/c Dr
To Consignee’s A/c To Commission A/c
(Being Commission on sale due to (Being Commission earned)
consignee)
7 Remittance from Consignee
Consigner A/c Dr
Cash/Bank A/c Dr
To Bank/Cash A/c
To Consignee’s A/c
(Being Balance due Payment made
(Being due amount received from
to consignor)
consignee)
8 Entry for Profit on Consignment
Profit & Loss A/c Dr
Not Applicable
To Consignment A/c
(Being Profit earned on consignment)
9 Loss on Consignment
Consignment A/c Dr
To Profit & Loss A/c Not Applicable
(Being Loss incurred on Consignment
transferred to the profit & Loss Account)

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Dr. S. Santha Kumari., M.Com., MBA., M.Phil., AP-SET., Ph.D., Asst. Professor, Commerce Dept., K L University, Guntur
  Note − The goods sent on consignment account will be closed by transferring
balance into the Purchase account or the Trading account.

 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.
Valueofclosingstock= Totalvalueofgoodssent × unsold stock
Net quantityreceived by consignee
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
Consignment A/c Dr
(a) If insurance premium is paid by the
To Cash A/c
consignor, then cash will be credited.
Or
(b) If Insurance premium is paid by the
To Consignee A/c
consignee, then consignee’s A/c will be
(Being Insurance premium paid)
credited.
2 Abnormal Loss A/c Dr
At the time of Abnormal Loss To Consignment A/c
(Being Loss Incurred)
3 Insurance Company (Name of the
Acceptance of Claim by Insurance insurer) A/c Dr
Company To Abnormal Loss A/c
(Being claim admitted)
4 Bank A/c Dr
On receipt of Claim To Insurance Company A/c
(Being amount of claim received)
5 Profit & Loss A/c Dr
To Abnormal Loss A/c
In Case of Loss
(Being amount of Abnormal Loss
transferred)
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Dr. S. Santha Kumari., M.Com., MBA., M.Phil., AP-SET., Ph.D., Asst. Professor, Commerce Dept., K L University, Guntur
Various expenses:

The various expenses are required for goods sent by consignor to consignee. Similarly,
the expenses are also required for storing and selling activity performed by the
consignee. These expenses are of two types:

1. Non-recurring Expenses

The expenses incurred between the period of goods sent by consignor to receive by the
consignee is known as non-recurring expenses. In other words, all expenses incurred
till the goods reach to the consignee are non-recurring expenses. Examples of non-
recurring expenses are as follows:

Expenses of the consignor

* Packing

* Carriage

* Docks dues

* Landing Charge

* Freight

* Insurance

Expenses of the consignee

* Unloading charge

* Dock dues

* Import duty

Non-recurring expenses must be included in the cost of the consignment. For arriving
at the consignment, these expenses are added. These expenses are also taken into
consideration while calculating the value of unsold stock or closing stock with the
consignee.

2. Recurring Expenses

The expenses paid by the consignee after receiving the consigned goods are known as
recurring expenses. These expenses are of recurring nature and do not increase the
value of goods. Though the recurring expenses are met by consignor or consignee,
these expenses should be borne by the consignor. Some examples of recurring
expenses are as follows:

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Dr. S. Santha Kumari., M.Com., MBA., M.Phil., AP-SET., Ph.D., Asst. Professor, Commerce Dept., K L University, Guntur
Expenses of the consignor

* Bank charges

* Expenses incurred on damaged

* Goods received back

Expenses of the consignee

* Storage charge

* Insurance

* Brokerage

* Advertising

* Salary to salesmen

* Expenses on goods return

* Goods damaged

* Commission on sale

Some important terms:

1. A shipment of goods by a manufacturer or wholesale dealer to an agent

to be sold by him on commission basis, on the risk and account of the
former, is known as consignment.
2. The person who sends the goods to the agent to be sold by him on
commission basis is called the consignor.
3. The person to whom the goods are sent for sale on commission basis is
called the consignee.
4. To the consignor, the consignment of goods is known as outward
consignment.
5. To the consignee, the consignment of goods is known as inward
consignment.
6. The goods consigned to the agent cannot be treated as sales at the
time of the consignment; they are treated as sales only when these are
sold by the consignee.

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Dr. S. Santha Kumari., M.Com., MBA., M.Phil., AP-SET., Ph.D., Asst. Professor, Commerce Dept., K L University, Guntur