CONSIGNMENTS AND BILLS OF EXCHANGE

DEFINITION Goods are delivered to another company with the understanding that payment for the goods is only made once the goods are sold. Consignment can cover just about any type of business. It is advantageous for the seller of consigned goods, because they don't need to pay suppliers upfront. The act of sending goods is called Consigning. Consignor The person sending the goods has ownership and risk in the goods, consignee holds the goods on behalf of the consignor. The consignor is responsible for the acts of the consignee in his status as an agent.

Consignee

The person receiving the goods and selling acts as the agent of the consignor only. The Consignee sells goods on behalf of the consignor and receives commission for his efforts. Any incidental expenses on the sale are to be reimbursed by the consignor or as agreed between them

DIFFERENCES BETWEEN CONSIGNMENT BUSSINESS AND NORMAL BUSSINESS

1. Transfer of Legal Ownership of the Goods: In case of sale, the legal ownership of the goods sold is transferred to the purchaser of goods. Whereas in case of a consignment of goods, the legal ownership of the goods is not transferred to the consignment but the ownership of the goods remains vested in the consignor till the goods consigned are sold by the consignee. 2. Relationship Between Consignor and Consignee: In case of a sale of goods, the relationship between the seller and the purchaser of the goods is that of a creditor and a debtor whereas in case of a consignment the relationship between the consignor and the consignee is that of a principal and agent. because the consignee is to sell goods on behalf of the consignor.

3. Expenses Incurred: In consignment, expenses incurred by the consignee in connection with the goods consigned to him are usually borne by the consignor whereas in case of a sale, expenses incurred after sale of goods are born by the purchaser. 4. Risk Attached to the Goods: In case of consignment, risk attached to the goods sold lies with the consignor till the goods consigned are sold by the consignee. But in case of a sale, risk attached to the goods sold is transferred to the buyer of goods. 5. Return of Goods: In case of consignment, return of goods is possible if the goods are not sold by the consignee. But in case of sale, return of goods is not possible as goods once sold are not returnable. 6. Requirement of Account Sale: In case of consignment, account sale is required to be submitted periodically by the consignee to the consignor. But in case of sales no account sale is required to be submitted by the purchaser to the seller.

PREPARATION ACCOUNT ON CONSIGNORS BOOKS As the goods sent on consignment by the consigner are not his sales, he must not record consignment as sales and the consignee must not record them as purchases. The consigner should not take up any profit on the transaction until the goods have been actually sold by the consignee. Since the goods still belong to the consignor, any unsold goods in the hands of the consignee at the end of the trading period should be included in the consignor's stock. The recording of the consignment transactions in the books of the consignor and consignee will be made in the following manner: (1) On dispatch of goods:Dr. Consignment account Cr. To Goods sent on consignment account (2) On payment of expenses on dispatch:Dr. Consignment account Cr. To Bank account (3) On receiving advance: Dr. Cash or bills receivable account Cr. To Consignee's personal account

(With the cost of goods)

(With the amount spent as expenses)

(With the amount cash or bill)

(4) On the consignee reporting sale (as per A/S):Dr. Consignee's personal account Cr. To Consignment account (5) For expenses incurred by the consignee (as per A/S):Dr. Consignment account Cr. To Consignee's personal account (6) For commission payable to the consignee:Dr. Consignment account Cr. To Consignee's personal account

(With gross proceeds of sales)

(With the amount of expenses)

(With the amount of expenses)

Assuming that all the goods sent have been sold, the consignment account will show at this stage the actual profit or loss made on it. The same is transferred to profit and loss account. The entry in case of profit is: Dr. Consignment account Cr. To profit and loss account In case of loss the entry is: Dr. Profit and loss account Cr. To Consignment account Note: The goods sent on consignment account may be closed by a transfer to trading account. When Consignment is Partly Sold: When all the goods sent on consignment have not been sold., the value of unsold goods in the hands of the consignee must be ascertained and the profit or loss should be found out by taking this stock into account. The entry is: Dr. Stock on consignment account Cr. To Consignment account Stock on consignment account is an asset and will be shown in the balance sheet of the consignor. Valuation of stock is discussed on valuation of stock page.

PREPARATION ACCOUNT ON CONSIGNEE BOOKS (1) When consignment goods are received:No entry is made in the books of account. The consignee is not the owner of the goods and therefore he makes no entry when he receives the goods. (2) For expenses incurred by the consignee:Dr. Consignor's personal account Cr. To Cash account (3) When advance is given:Dr. Consignor's personal account Cr. To Cash or bills payable account (4) When goods are sold:Dr. Cash or bank account Cr. To Consignor's personal account (5) For commission due:Dr. Consignor's personal account Cr. To commission account The consignor's account will be closed by debiting it with cash or final bill or draft in settlement.

THE CONCEPT BILLS OF EXCHANGE A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque, defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. It is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three partiesthe drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to the third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee.