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LESSON OBJECTIVES
At the end of this module, you will be able to:
1. Know what is a consignment arrangement;
2. Know the accounting for the consignor
3. Know the accounting for the consignee
ABSTRACTION
Consignment Sale Transaction
A consignment constitutes transfer of possession of merchandise without the transfer of title from
the owner, called the consignor, to another person, called the consignee. The consignee acts as
an agent in behalf of the consignor for the purpose of selling the goods for a commission.
The shipment of goods to the consignee is not treated as a sale. Although a transfer of goods has
taken place, it is not the intent of either parties that sale and purchase transactions take place.
Title of the goods remains with the consignor, and recognition of the sale is deferred until goods
are transferred to a third party by the consignee. In other words, the intent of the parties is to
transfer title directly from the consignor to the third party.
A modified version if the sale basis (regular sakes) of revenue recognition is used b the consignor.
Revenue is recognized only after the consignor receives notification of sale and the cash
remittance from the consignee.
The merchandise is carried throughout the consignment as the inventory of the consignor,
separately classified as Merchandise Inventory on Consignment. It is not recorded as ab asset
on the consignee’s books. upon sale of the merchandise, the consignee has liability for the net
amount due the consignor. The consignor periodically receives from the consignee account sales
that show the merchandise received, merchandise sold, expenses chargeable to the
consignment, and the cash remitted. Revenue then is recognized by the consignor. At that time,
the transaction is recorded as a sale on the books of the consignor.
Because title to the merchandise is held by the consignor but physical possession is held by the
consignee, special accounting records must be maintained by the consignor for control purposes.
No revenue is recognized until a sale is made by the consignee. Upon shipment of the
merchandise by the consignor, an inventory account is established on the consignor’s books to
identify the consigned merchandise. Any consignment expenses paid by the consignor are added
to the inventory balance as added costs. The consignee does not make an entry for receipt of the
inventory in the general ledger; however, memorandum control records usually are kept. Any
reimbursable expense paid by the consignee is charged to a receivable account by the consignee
1
MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY
and added to the inventory balance by the consignor. When a sale is made, consignor recognizes
the sale as revenue according to one of the revenue recognition methods, and the consignee
recognizes the commission as revenue on the transaction.
b. Prepare periodic reports. The consignee normally creates a special account: Consignor
Receivable or Consignor Payable
1. Consignment transaction recorded separately – under this method, two accounts are
needed to be maintained in relation to consignment transaction
APPLICATION
ILLUSTRATION: Consignment Sales
2
MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY
ABC Co. enters into a consignment arrangement with XYZ, Inc. Under the arrangement, ABC Co.
transfers goods to XYZ, Inc. which XYZ undertakes to sell on behalf of ABC Co. in exchange,
XYZ, Inc. is entitled to a 20% commission based on sales.
April 3: XYZ Inc. sells consigned goods costing P55,000 for P100,000. ABC Co. is not notified of
the sale.
April 7: XYZ Inc. makes the weekly remittance of sale proceeds, net of commission, to ABC Co.
Requirement: Prepare the journal entry in each books of ABC Co. and XYZ, Inc.
DATE ABC Co. – Consignor XYZ, Inc. - Consignee
April 1 Memo Entry Memo Entry
Notice, no entry made on April 3 as far as the books of the consignor is concerned. That is
because ABC was not notified of the sale. In practice, it is uncommon to notify the consignor on
every sales of the consignee. More commonly, the consignor receives update about the sales
schedule on a timely manner. (i.e., weekly, monthly or quarterly, depending on the arrangement)
Assuming the consignor was notified on April 3 about the sales made by the consignee. ABC Co,
should input the following journal entry on its books:
April 3 Receivable from XYZ 80,000
Commission Expense 20,000
Revenue 100,000
REFERENCES
BALOCATING, R. (2015). Advanced Accounting. Quezon City: C&E Publishing, Inc.
Dayag, A. J. (2015). Advanced Accounting 1. Manila: Lajara Publishing House.
MILLAN, Z. V. (2018). Accounting for Special Transactions. Baguio City: Bandolin Enterprise.