Consignment Accounts Notes | Financial Accounting Notes | Valuation of Stock

Consignment Accounts Notes
For CA/CS/CMA/B.Com Exam

Meaning of Consignment

Business organisation sometimes sale their goods through agents as an alternative to selling goods themselves. Consignment is a kind of business expansion without opening a branch in a new potential market. In Consignment, a manufacturer or wholesaler dispatches goods to an agent who has a better knowledge of the local market, for the purpose of sale.

The person sending the goods is called the consignor and the agent who receives the goods is called the consignee. The Consignee markets the product and receives commission at a stipulated rate on the total sales. He is also entitled to recover such expenses which he incurs in connection with the consignment.

The following features of consignment are:

1.       The relationship between the consignor and consignee is called Principal and Agent but not buyer and seller.

2.       The goods consigned to agent remain the property of the principal so far as these are not sold by the agent. In other words, ownership of the goods consigned is not transferred to the agent.

3.       The agent is to sell goods on account and risk of principal.

4.       All expenses incurred by the agent on goods consigned to him are to be paid by the principal.

5.       The agent is expected to take reasonable care of the goods consigned to him.

6.       The agent is not liable to make the payment of the goods until these are sold.

7.       The consignee is entitled to a commission, which is calculated on the basis of gross sales made by him.

8.       Firms usually like to ascertain the profits or loss on each consignment or consignments to each agent.

Consignment accounts

In accounting, the term “Consignment account” relates to accounts dealing with a situation where one person (consignor) sends goods to another person (consignee) on the basis that the goods will be sold on behalf of and at the risk of the former. Consignment accounts are the accounts recording the transactions relating to the goods sent on consignment.

A consignment account is prepared by the consignor of goods sent to be consignee. All transactions such as cost of goods supplied, expenses incurred by consignor or consignee, consignee’s commission, sales unsold stock, profit or loss on consignment are to be recorded through this account. This account presents a summary of the transactions that have taken place consignor and the consignee. The consignment account reveals profit or loss on consignment and is thus a mini trading and profit and loss account. Consignment account is a nominal account.

Therefore, the following items are debited to this account:-

a)      Cost of goods sent on consignment;

b)      Expenses incurred by the consignor;

c)       Expenses incurred by the Consignee;

d)      Consignee’s Commission;

e)      Bad debts when Del-Credere Commission is not paid, and

f)       Profit on Consignment,

The following items are credited to the consignment account:

a)      Sales proceeds,

b)      Returns of goods by consignee,

c)       Abnormal loss of goods,

d)      Unsold stock with the consignee; and

e)      Loss on consignment (if any)

Important points that should be noted while preparing consignment account

a)      Consignor: The party which sends the goods also called Principal.

b)      Consignee: The party to whom goods are sent also called Agent.

c)       Ownership: The ownership of the goods sent on consignment remains with the consignor. On sale, the buyer becomes the owner.

d)      Proforma invoice: In consignment business, the goods are sent on consignment to agent for resale. Since it cannot be treated as sales, Instead of sending invoice, Proforma Invoice (statement) is prepared by consignor to inform the quantity, quality and price of goods, expenses by consignor, price of goods to be sold, loading if any on cost price etc. to consignee. The price mentioned in the Proforma invoice is known as ‘Proforma Invoice Price’.

e)      Recovery of Consignee expenses: The agent can recover from the principal all expenses incurred by him on the consignment subject to agreement between both agent and principal.

f)       Advance from consignee: It is adjusted against the sale proceeds of the goods.

g)      Accounts sales: It is prepared by the consignee. The consignee sends a periodic statement of account to the consignor. This statement is called Account sales. The statement contains the details of:

1.       Sale made by the consignee.

2.       Expenses incurred on behalf of consignor

3.       Commission earned by the consignee

4.       Advance payment or security deposited with consignor and the extent which it has been adjusted.

5.       Unsold stock, if any, left with consignee and

6.       Net balance due to / due from the consignee.

Difference between Consignment and Sale

Basis	Consignment	Sale
a)     Ownership	Ownership remains which the principal.	Ownership passes to the buyer.
b)     Relationship	The relations are of principal and agent, and continue till terminated	The relations terminated as soon as the goods are delivered and payment is made.
c)      Account sales	For giving details about the goods sold and expenses incurred by him, consignee sends the account sales to consignor.	No such statement is prepared.
d)     Expenses	The expenses incurred by the consignee to execute sale and the expenses incurred by consignor to send the goods to the consignee, both are borne by the consignor	Any expenses incurred after the sale is not borne by the seller.
e)     Loss of goods	The risk is of consignor.	The risk is of buyer after sale.
f)      Return of goods	Can be returned by consignee at any time.	Buyer cannot return the goods unless otherwise agreed.
g)     Stock	The unsold stock with the consignee will be treated as a stock of the consignor.	In case of sale, the buyer's unsold stock do not attract the seller.
h)     Commission	Commission is the main consideration of consignment. The consignee performs the selling activity only for commission.	Profit is the main consideration of sales.

Valuation of Unsold Stock in Consignment Accounts

Usually, at the time of closing of the books some of the goods remain unsold. For correct accounting it is necessary that such unsold stock should be valued properly. The general principal of valuing stock on the basis of cost of market price, whichever is lower applies in this cost also. However, the meaning of cost should be properly considered. If the expected selling price of stock on hand is lower than the cost the value put on the stock should be net expected selling price only, i.e. expected selling price less delivery expenses, etc.

In addition to the purchase price, those expenses which are necessary to put the goods in their present place and condition must also be taken into account. Usually all expenses till the goods are placed in the consignee’s Godown are treated as part of cost. Instances of such expenses are freight, insurance in transit, customs duty, Octroi duty, Cartage, etc to the godown of the consignee.

Expenses incurred after the goods reach the consignee’s godown, such as rent and insurance for the godown, interest, etc, do not add to the value of goods. Such expenses, therefore, are not considered while valuing stock. The journal entry for unsold stock is:

            Stock on Consignment A/c……Dr

To Consignment Account

Calculation of Unsold Stock

Cost of unsold stock Add: Proportionate expenses of consignor  (all expenses/net goods sent on consignment*unsold stock) Add: Proportionate expenses of consignee (all expenses incurred by consignee till the goods reach his premises*unsold stock/goods received by him)	Xxxxxxxxx xxxxxxxxx xxxxxxxxx
Value of Closing Stock	XXXXXXXX

Treatment of Normal and Abnormal loss in Consignment Accounts

Normal loss: Losses which are arises due to nature of goods and which cannot be avoided is called normal loss. Such loss would be spread over the entire consignment while valuing stock. The total cost of material and expenses incurred should be dividend the net quantity (Total quantity – normal loss) to ascertain the cost per unit.

Suppose 1,000 kg of apples are consigned to a wholesaler, the cost being Rs.3/- per kg, plus Rs.400/- of freight. It is concluded that a loss of 15% is unavoidable. The cost per kg will be Rs.3400/850 or Rs.4/-. If the stock is 100 kgs, its value will be Rs.400/-

Abnormal loss: Losses which are accidental in nature or which can be avoided are called abnormal loss. Value of abnormal loss must be deducted from total cost to find out actual and comparative profit.

Calculation of value abnormal loss

It is calculated in the same way as value of unsold stock which is stated below:

Cost of abnormal loss (net expected selling price if it is less than the cost price) Add: Proportionate expenses of consignor  (all expenses/net goods sent on consignment*abnormal loss) Add: Proportionate expenses of consignee (all expenses incurred by consignee till the goods reach his premises*abnormal loss/goods received by him) Value of abnormal loss Less: Insurance claim Net abnormal loss

Xxxxxxxxx xxxxxxxxx   xxxxxxxxx xxxxxxxxx ------------ Xxxxxxxx

1.       Amount of abnormal loss credited to Consignment account.

2.       Insurance claim is credited to abnormal loss account.

3.       Balance of abnormal loss transferred to profit and loss account.

4.       In case of abnormal loss in transit, the proportionate expenses of consignee are not added.

Types of commission paid by the consignor to consignee

Ordinary or Normal Commission: The commission simply denotes the ordinary commission. It is based on fixed percentage of the gross sales made by the consignee. It is given by the consignor with regardless of whether the consignee is making credit sales or not. This type of commission does not give any protection to the consignor from bad debts to consignor.

Del – Credere commission: Such commission gives protection to the consignor against bad debts. If such commission provided, then loss arises due to bad debt is to be borne by consignee not by consignor. It is calculated on total sales but if mentioned in question then on credit sale.

Over – riding commission: It is an extra commission allowed by consignor to promote sales at higher price than specified or to encourage consignee to put hard work in introducing new product in the market. Depending on the agreement it is calculated on total sales or on difference between actual sales and sales at invoice price or any specified price.

Treatment of Advance given by the Consignee to the Consignor

If advance payment made by consignee at the time of delivery for the goods consigned, it is adjusted against the amount due by the consignee on account of goods sold.

But if advance payment is made by consignee as security against goods consigned to him, then full amount is not adjusted if goods are not fully sold. Proportionate security in respect of unsold stock is to be carried forward till the respective goods held by the consignee.

Return of goods by the Consignee

a)      Goods can be return at any point of time.

b)      Goods are returned due to various reasons such as poor quality, destroyed in transit etc.

c)       Such goods are valued at the same price at which it is consigned to them.

d)      Expenses on returning such goods are not taken into consideration while valuing stock as such expenses are not incurred to bring the goods in the saleable condition.

Journal Entries in the Books of Consignor:

(1)	For goods sent on consignment
	Consignment account	Dr.	(With the cost of goods)
	To Goods sent on consignment account
(2)	For payment of expenses by the consignor
	Consignment account	Dr.	(With the amount spent as expenses)
	To Bank/Cash account
(3)	For advance or Security against goods sent received from consignee
	Cash or Bank or bills receivable account	Dr.	(With the amount cash or bill)
	To Consignee's personal account
(4)	For maturity of Bills receivable
	Cash or Bank account	Dr.	(With the amount cash or bill)
	To Bills Receivable account
(5)	For sale of goods by Consignee as per account sale
	Consignee's personal account	Dr.	(With gross proceeds of sales)
	To Consignment account
(6)	For expenses incurred by the consignee as per account sale
	Consignment account	Dr.	(With the amount of expenses)
	To Consignee's personal account
(7)	For commission payable to the consignee:-
	Consignment account	Dr.	(With the amount of expenses)
	To Consignee's personal account
(8) 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:
	Consignment account	Dr.
	To profit and loss account
In case of loss the entry is:
	Profit and loss account	Dr.
	To Consignment account
(9)  Goods sent on consignment account may be closed by a transfer to trading account. Journal entry in this case will be Goods sent on consignment account To Trading account
(10) For Unsold Stock: 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:
	Stock on consignment account	Dr.
	To Consignment account
Accounting Entries in the Books of Consignee
(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:-
	Consignor's personal account	Dr.
	To Cash account
(3)	When advance is given:-
	Consignor's personal account	Dr.
	To Cash or bills payable account
(4)	When goods are sold:-
	Cash or bank or Debtors account	Dr.
	To Consignor's personal account
(5)	For commission due:-
	Consignor's personal account	Dr.
	To commission account
(6)	For Bad Debt: (if there is no del-Credere commission)
	Consignor's personal account	Dr.
	To Sundry Debtors Account
(7)	For Bad Debt: (If there is del-Credere commission)
	Commission account	Dr.
	To Sundry Debtors Account
(8)	For realisation of cash from debtors
	Cash Account	Dr.
	To Sundry Debtors Account
(9)	On settling the account with consignor
	Consignor’s Personal Account	Dr.
	To Bank/Cash Account

When Goods are invoiced above cost

Sometimes the proforma invoice is made out at a value higher than the cost and entries in the books of the consignor are made out on that basis – even the stock remaining unsold will initially be valued on the basis of the invoice price. It must be remembered, however, that profit can be ascertained only if sale proceeds plus stock on hand, valued on cost basis, is compared with the cost of the goods concerned together with expenses. Hence, if entries are first made on invoice basis, the effect of the loading (amount added to arrive at the invoice price) must be removed by passing the following additional entries:

(1)	Entry to deduct loading in order to debit consignment account on cost basis
	Goods sent on consignment Account	Dr.
	To Consignment Account
(9)	Entry to deduct loading included in stock in hand
	Consignment Account	Dr.
	To Stock reserve Account