CONSIGNMENT ACCOUNTING

JOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.



Definition and Explanation of Consignment:

The word consignment can be generally defined as the act of sending a quantity of goods by the manufacturers and producers of one country or place to their agents in another at the risk of the principals for the purpose of sale.

Goods so sent are known as "consignment". The sender of the goods is called the consignor. Generally the manufacturers or producers are consignors. The person to whom goods are forwarded for the purpose of sale is known as the consignee. The consignment can be classified as:

Outward consignment.

Inward consignment.

It is called "outward" when the dispatch of a quantity of goods from one country to another is made for the purpose of sale and is called "inward" when the receipt of the quantity of goods is made for the purpose of sale.

Goods sent on consignment do not become the property of the consignee. He has not bought them. The ownership remains with the sender or the consigner. If the goods are destroyed, the receiver (consignee) is not responsible. The loss will fall on the consignor. The consignee tries to sell the goods according to the instructions of the consignor. When the goods have been sold, he will deduct his expenses, commission, etc., from the sale proceeds and the balance is remitted to the consignor. The relationship between the consignor and the consignee is that of principle and agent. The consignee is the agent. The consignee acts entirely on behalf of the consignor. The consignee is entitled to his remuneration which is generally fixed on the basis of a commission of sales. The expenses incurred by the consignee must also be reimbursed by the principal. It is important to remember that the consignee does not buy the goods; he merely receives the possession of the goods.

Distinction/Difference Between Consignment and Sale:

The following are the main points of the difference between consignment and sale.

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.

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.

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.

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.

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.

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.

Definitions of Important Terms Used in Consignment Accounting:

Commission:
The term commission as used in connection with consignment denotes the remuneration of the consignee for selling the goods of the consignor. This commission is generally calculated at a rate percentage on the gross proceeds of the sales.

Del Credere Commission:
The del credere commission is an extra commission allowed to the consignee on his guaranteeing the realization of the debts in full, in connection with the credit sale of goods on consignment. Goods may be sold by the consignee either for cash or on credit. When they are sold on credit, the consignee may guarantee that they will be duly paid for and that he will be liable to indemnify the consignor for all bad debts. In such cases; the consignor pays the consignee an extra commission for this guarantee. The extra commission is called del credere commission.

Advance Against Consignment:
Usually the consignee is asked to accept a bill of exchange to cover part of the value of goods. This is a guarantee by the consignee that when sales are effected, he will make the necessary payment. Of course, instead of a bill of exchange, the agent may remit a sum of money to the principle as an advance. This advance or the amount of the bill of exchange will be adjusted when the goods are sold.

Consignment Account:
The consignment account is one which shows what profit or loss is made out of the dealing of the goods sent on consignment. It is the combination of the trading and profit and loss account of any particular consignment.

Proforma Invoice:
When the consignor sends the goods to the consignee, he forwards a statement showing the particulars such as quantity, quality, price of goods etc. This statement is called the Proforma invoice. But in case of regular sale, an invoice is prepared and sent along with the goods. It implies that a sale has taken place.

Account Sale:
An account sale is a statement prepared and sent by the consignee to the consignor at periodical intervals, dealing there in the goods sold, price realized, expenses incurred, commission payable to and the net amount due from the consignee.

Consignment Accounting Journal Entries:

As the goods sent on consignment by the consigner are not his sales, he must not record consignment as sales and the consignee must 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:

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:
KHALID AZIZ
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.
Accounting Entries in the Books of Consignor:
(1) On dispatch of goods:-
Consignment account (With the cost of goods)

To Goods sent on consignment account

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(2) On payment of expenses on dispatch:-
Consignment account (With the amount spent as expenses)

To Bank account

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(3) On receiving advance:
Cash or bills receivable account (With the amount cash or bill)

To Consignee's personal account

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(4) On the consignee reporting sale (as per A/S):-
Consignee's personal account (With gross proceeds of sales)
To Consignment account

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(5) For expenses incurred by the consignee (as per A/S):-
Consignment account (With the amount of expenses)

To Consignee's personal account

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(6) For commission payable to the consignee:-
Consignment account (With the amount of expenses)

To Consignee's personal account

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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
To profit and loss account

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In case of loss the entry is:


Profit and loss account
To Consignment account

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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:


Stock on consignment account
To Consignment account

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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.


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.

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(2) For expenses incurred by the consignee:-
Consignor's personal account
To Cash account

(3) When advance is given:-
Consignor's personal account
To Cash or bills payable account

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(4) When goods are sold:-
Cash or bank account
To Consignor's personal account

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(5) For commission due:-
Consignor's personal account
To commission account

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The consignor's account will be closed by debiting it with cash or final bill or draft in settlement.


Valuation of Unsold Stock Or Closing Stock in Consignment Accounting:

The valuation of stock laying with the consignee at the time of final closing of the account of the consignor is generally made at cost or market price whichever is less. The meaning of cost, however, should be properly understood. Cost should not mean merely the cost at which the consignor invoices the goods. If such expenses as normally increase the value of goods have been incurred, a proportionate of such expenses should be included in the cost. In other words, all the expenses incurred to move the goods from the consignor's premises to the premises of consignee should be included. Expenses which are incurred up to the moment the goods are received into the godown of the consignee are treated as part of the cost. But expenses incurred after the goods have been put into the godown should not be included into the cost because such expenses do not increase the value of goods. Examples of such expenses are godown rent, insurance godown, advertisement, salaries of salesmen, etc. It does not matter who pays the expenses (consignor or consignee).

Example:
Suppose, 1000 units are dispatched at a cost of $20 each. The consignor pay $100 for insurance in transit and $200 for packing. The consignee pays 700 for freight, $100 as octroi duty and $100 as cartage. He also pays $200 as godown rent and $150 as insurance premium. The last two items will be excluded while calculating the cost. The total cost will be $20,000 + $100 + 200 + 700 + $100 + $100 = $21,200. The cost per unit, therefore, comes to $21.20. If 100 units remain unsold, the value of stock will be: 100 × 21.20, i.e., $2,300. If the market price is less than this figure, then the value of stock will be on the basis of market price.

Valuation and Treatment of Normal and Abnormal Loss in Consignment Accounting:

Normal Loss:
Normal loss of goods should also be considered while valuing the closing stock or unsold stock. Normal loss means inherent and unavoidable loss. For example if a certain quantity of coal is consigned, some of it is bound to be lost because of loading and unloading and because of some of it turning into dust. In the nature of coal shortage is unavoidable.

Example:
Suppose 100 tons of coal are despatched. The cost of one ton of coal is $20 and the freight incurred is $470. To the consignor the total cost is $2,470. Suppose, the consignee receives only 95 tones. In that case the consignor can say that the cost of one ton of coal is $2,470/95 or $26. If 20 tons of coal are left unsold with the consignee, the value of stock will be $20 × $26 = $520.

Abnormal Loss:
Some losses are accidental or may arise out of carelessness. For example, theft of goods or destruction of goods by fire. Such losses are more or less abnormal and in any case, do not occur often. Suppose part of the goods stolen. This will reduce the value of stock and, therefore, the profit on consignment. In order to see the effect of theft clearly, it is better to find out the value of the goods thus lost. After finding out the value, the consignment account is credited and profit and loss account is debited. The effect of this will be that the consignment account will show its proper profit and in the profit and loss account this profit will be reduced to show actual profit. If part of the loss is recoverable from an insurance company, the amount which can be recovered should be deducted from the loss for the purpose of debiting the profit and loss account. The amount of the loss should be calculated like stock on consignment.

Example/Problem of Abnormal Loss:
1,000 Motors were consigned by A & Co., of Lahore to Bashir of Karachi at an invoice cost of $150 each. A & Co., paid freight $10,000 and insurance $1,500. During transit 100 motors were completely destroyed. Bashir took delivery of the remaining motors and paid $14,400 as duty.

Bashir sent a bank draft to A & Co., for $50,000 as an advance payment and later sent an account sale showing that 800 motors were sold at $220 each. Expenses incurred by Bashir on godown rent and advertisement etc., amounted to $2,000. Bashir is entitled to commission of 5 per cent.

Required: Prepare consignment account and Bashir's account in the books of A & Co., assuming that nothing has been recovered from the insurance company due to defect in the policy.

Consignment to Karachi Account

$ $
To Goods sent on consignment 1,50,000 By sales (800 × 220) 1,76,000
To Bank - freight and insurance 11,500 By Profit and loss account - Ab. Loss* 16,150
To Bashir - duty 14,400 By Stock on consignment** 17,750
To Bashir - expenses 2,000
To Bashir - commission 8,800
To Profit and loss account 23,200

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2,09,900 2,09,900

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Bashir

$ $
To Consignment account 1,76,000 By Bank 50,000
By Consignment account
Duty 14,400
Expenses 2,000

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16,400
By Consignment account-commission 8,800
By Balance c/d 1,00,800

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1,76,000 1,76,000

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Working Note:

(1)
*Calculation of abnormal loss:
100 motors at $150 each $15,000
Add 100/1000 of freight and insurance (11,500 × 100/1000) 1,150

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Abnormal loss 16,150

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(2)
**Calculation of Closing Stock:
100 motors at $150 each $15,000
Add 100/1000 of freight and insurance (11,500 × 100/1000) 1,150
100/900 of duty 1,600

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Closing stock or unsold stock 17,750

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JOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.


Invoicing Goods Higher Than Cost in Consignment:

Sometimes in place of sending the goods to the consignee at cost price the consignor invoices them at higher price, the object being not to disclose to the consignee the amount of consignor's profit. The pro-forma invoice is sent to the consignee. The real cost of the goods is not disclosed. Therefore the entries made in this case are a little different from those if the goods are sent at actual cost. The difference in entries is only in respect of goods sent on consignment and stock. When goods are invoiced at selling price, the following entries are made:

On sending goods at invoice price i.e., higher than cost:-

Consignment Account Dr.
To Goods Sent on Consignment Account Cr.


At the end of the year difference between the invoice price and the cost will be credited to the consignment account by debiting goods sent on consignment account. For example, if the goods costing $10,000 are invoiced at $12,000 an entry will have to be made at the end of the year for $2,000.

Goods Sent on Consignment Account Dr.
To Consignment Account Cr.

The purpose of this entry is to show the cost of goods sent out and calculate the profit on consignment.


The stock in hand at the end of the year (unsold stock) with the consignee will be valued according to the invoice price plus the share of expenses. The usual entry is:-

Stock on Consignment Account Dr.
To Consignment Account Cr.


As the stock should not be shown at more than cost, therefore, the difference in entry No. 3 above will be calculated and the following entry will be passed:

Consignment Account Dr.
To Stock Reserve Account Cr.

In the balance sheet, the stock reserve account will appear on the asset side as reduced from the stock on the consignment account.

Example:
Rashid of city A sends 100 sewing machines on consignment to Malik of city B. The cost of each machine is $130 but the invoice price is at the rate of $160 each. Rashid spends $400 on packing and despatch. Malik receives the consignment and immediately accepts Rashid's draft for $8000. Subsequently, Malik informs Rashid that 80 machines have been sold at $175 each. Expenses paid by Malik are; freight $600, godown rent $50, and insurance $100. Malik is entitled to a commission of 6 per cent on sales and 1-1/2 percent as del credere commission.

Give journal entries in the books of Rashid . Also prepare necessary ledger accounts:

Solution:
Journal

Consignment to city B 16,000
To Goods sent on consignment account 16,000
(100 machines at $160 each sent on consignment)

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Consignment to city B 400
To Cash account 400
(Expenses incurred on consignment)

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Bills receivable account 8,000
To Malik 8,000
(Malik's acceptance received)

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Malik 14,000
To Consignment to city B account 14,000
(80 machine's sold Malik at $175 each)

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Consignment to city B account 750
To Malik 750
(Expenses incurred)

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Consignment to city B account 1,050
To Malik 1,050
(Commission at 6% plus 1-1/2 on sales)

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Consignment to city B account 600
To Stock reserve account 600
(Difference in closing stock adjusted)

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Stock on consignment account 3,400
To Consignment to city B account 3,400
(Value of 20 machines in the hands of Malik)

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Goods sent on consignment account 3,000
To Consignment to city B account 3,000
(The difference in the invoice value and cost, $30 per machine adjusted)

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Goods sent on consignment account 13,000
To Trading account 13,000
(Transfer of goods sent on consignment to trading account)

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Consignment to city B account 1,600
To Profit and loss account 1,600
(Transfer of profit on consignment)

JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.