CHAPTER – 3

CONSIGNMENT ACCOUNT
Introduction:
Business enterprises, apart from marketing their goods directly, also market them through
agents. When organizations do not have a reach for all markets or do not have sufficient
knowledge about certain markets, they appoint agents who have better knowledge of the local
markets, for marketing their products. Such arrangement of sending goods to agents for further
sale by them in the pre-defined market is called Consignment. The agent will be compensated
with commission for marketing the goods on behalf of his principal, l.e., the business enterprise
(manufacturer or wholesaler or dealer).
Meaning of Consignment:
Consignment is an agreement under which a manufacturer or a wholesaler sends goods to his
agent for the purpose of sale on his behalf and at his own risk on commission basis.
The person sending the goods on consignment to another person is called consignor
(Principal).
The person to whom the goods are sent on consignment is called the consignee (Agent).
The relationship between the consignor and consignee is that of principal and agent.
The consignee sells the goods on behalf of the consignor and may be allowed to incur
expenses for this purpose.
The expenses and losses incurred by the consignee for selling the consigned goods will
be reimbursed by the consignor unless otherwise agreed.
Thus, Consignment refers to sending of goods by a principal to his agent, who sells the goods
on behalf of the principal in return for a commission.
Features of Consignment:
1. Goods are forwarded by the consignor to the consignee with an objective of sale at a profit.
2. The person sending the goods on consignment is called the consignor and the person to
whom the goods are sent on consignment is called the consignee.
3. Under the consignment, goods are to be treated as the property of the consignor and to
be sold at his risk entirely. The consignee does not buy the goods, he merely undertakes to
sell them on behalf of the consignor. He is not responsible for any loss or even for any
destruction or damages to the goods. But the consignee should not show any negligence.
4. The consignor does not sell the goods to the consignee. Therefore, he cannot ask the
consignee to pay the price of the goods unless they are sold and the sale proceeds are actually
realized.
5. The consignee agrees to sell the goods for an agreed rate of commission and is allowed to
deduct his commission due from the sale proceeds.
6. The relationship between the consignor and the consignee is that of principal and agent.
7. The consignee is generally allowed to incur expenses to sell the goods consigned which will
be reimbursed by the consignor.
8. Any stock remaining unsold with the consignee belongs to the consignor.
9. As the consignee acts on behalf of the consignor, the profit or loss on sale of goods sent on
consignment belongs to the consignor.
10. When the good are sent by the consignor he prepares a Proforma Invoice and sends it to
the consignee.
11. Sometimes before sending the goods, the consignor may require the consignee to remit
same money as advance.
12. The consignee sends periodically to the consignor a statement called Account Sales giving
details of goods sold. Expenses incurred by him etc.
Different between Sales and Consignment:

Advantages of Consignment:
1. It enables a business enterprise to reach its goods to every place in the country and
even outside, without the organization having its presence there.
 2. It is most economical form of business expansion since without opening branches,
the market for goods can be increased and maximized.
3. It enables the business enterprise to capture better market share and be a dominant
player in the industry.
Important terms used in consignment:
1. Proforma invoice:
A Proform Invoice is a statement prepared and sent by the consignor to the consignee giving
the details of the goods sent. It looks like a regular invoice. But it does not make the consignee,
responsible to pay the amount mentioned therein, i.e. It does not make the consignee a debtor
for the amount mentioned therein.
SPECIMEN OF PROFORMA INVOICE
KARNATAKA TRADERS

Note: E. &O.E. stands for Errors and Omissions Excepted. Which mean that invoice is subject
to the errors of omission and commission.
In the above invoice Karnataka Traders are the consignors and Hari Kishan Enterprises the
consignee. Goods worth 3, 00,000 have been consigned on which a sum 13,000 has been
incurred on various expenses.
2. Commission:
 ⮚ Commission is the remuneration paid to the consignee by the consignor for the services
rendered by the consignee in selling the consigned goods.
⮚ Commission is calculated total sales effected by the consignee. The commission, a
consignee received may be of three type which may be paid simultaneously or in
isolation.
i. Ordinary Commission:
The commission paid to the consignee when he is not responsible for any bad debt is called
ordinary commission. It is calculated as a fixed percentage on total sales made by the
consignee. The term commission simply denotes ordinary commission
The ordinary commission can be calculated in the following ways
(a) Commission per Unit * Units Sold
(b) Commission % * Total Sales
ii. Del Credere Commission:
The commission paid to the consignee when he is responsible for the bad debts incurred a of
credit sales effected by him is called del-credere commission. In other words, it is the addition
commission paid to the consignee to bear the loss of bad debts incurred by him. When del-
crede commission is paid to the consignee, the consignor need not bear the loss of bad debts
arising due to the credit sales made by the consignee.
If consignor does not pay Del-credere commissions then, entire responsibility of credit sales and
collection from debtors belongs to consignor. Normally, commission is calculated in the
following manner:
DCC=Del-credere Commission % * Total Sales
iii. Over-riding Commission:
It is an extra commission allowed by the consignor to the consignee to promote sales at higher
price than specified or to encourage the consignee to put hard work in introducing new product
in the market. Depending on the agreement between consignor and consignee, it is calculated
on total sales or on the difference between actual sales and sales at invoiced price or any
specified price.
The overriding commission (ORC) is calculated in the following manner
ORC= ORCS * Surplus Price Realized (SPR)
Where: SPR=
(a) Gross Sales-Cost Price of Goods Sold
Or
(b) Gross sales- Invoice Price of goods sold
Or
(c) Gross sales Specified selling price of goods sold
Illustration-1 (Problem on Calculation of Commission)
Mr. Ajith sent 2,500 units costing 1,000 each to Mr. Kumar. Mr. Kumar sold 1,500 unit at 1,420
per unit on credit and 750 units @ 1,400 each for cash.
Calculate commission payable to consignee in the following cases:
(a) If Mr. Kumar was entitled to a commission of 50 per unit sold.
(b) If Mr. Kumar was entitled to an ordinary commission at 5% and del-credre commission at 2%
On sales.
Illustration-2(Problem on Calculation of Commission)
Mr. ‘A’ of Bangalore sends goods costing 3, 00,000 to Mr. B of Mumbai, Commission payable
was 2% on sales plus 3% on sales as Del-credre commission. The entire goods were sold by
Mr. ‘B’ for 4, 00,000. However, consignee is able to recover 3, 95,000 from the debtors.
Calculate total commission payable to Mr. B, and amount to be transferred to Profit & loss
account.
Illustration-3(Problem on Calculation of Commission)
Mr. X sold goods for cash at 1, 20,000 and an credit at 7 54,000. One of the debtors failed to
pay 5,000 and the remaining debtors were fully realized. The consignee is entitled to 10%
ordinary and 5% Del-credre commission.
Calculate the total commission due to consignee, and amount to be transferred to Profit & Loss
Account.
Illustration-4(Problem on Calculation of Commission)
M. Amar sent 2,500 units costing 1,000 each to Mr. Ramesh. The goods were to be sold so as
to yield a gross profit of 20% on sales. Mr. Ramesh sold 1,500 units at 1,420 per unit on credit
and 750 units @ 1,400 each for cash.
Calculate the over-riding commission of at 2% on any surplus price realized by Mr. Ramesh
3. Advance:
Sometimes consignor may ask the consignee to pay an advance for the part of the Value of
goods consigned. Consignee may send the advance in the form of a draft or cheque. If the
consignee is not in a position to pay advance money, a Bill may be drawn on consignee.
Consignor may discounts the Bill and gets the money. The amount of discount on the Bill may
be debited to discount account. This Advance will be deducted from the sales proceeds. While
making the final payment by the consignee.
4. Account Sales:
Periodically the consignee sends to the consignor a statement giving the details of goods sold,
expenses incurred by him on the goods consigned, commission earned by him, amount of
advance adjusted, balance outstanding etc. This statement is called Account Sales. The
'Account Sales contains the following details:
a. Sales effected by the Consignee.
b. Expenses incurred by the Consignee.
c. Commission earned by Consignee.
d. Advance paid by the consignee, if any, and
e. Net amount due from the consignee to the consigner.
Consignor makes record of consignment transactions in his books based on the Account
Sales received by him from the Consignee.
The following is the format on an Account Sales

Illustration-5(Problem on account sales)

From the following details prepare an Account sales:
Consignor : Ajantha Cycles Ltd. Haryana
Consignee : Sri Ram Cycles, Chennai
Consignment : 100 Cycles at 1,200 each
Sales : 50 Cycles at 1,400 each
Consignee's Expenses : 20 Cycles at t 1.500 each
Freight & Cartage : 5,000
Godown Rent : 2,000
Other expenses : 1,000
Consignee's Commission: 10%
Recurring and Non-recurring Expenses:
Consignor and consignee have to incur some expenses for dispatching and selling the goods
these expenses of consignment are of two types: Non-Recurring Expenses and Recurring
Expenses

⮚ Non-recurring Expenses:
All the expenses incurred till the goods reach the premises of the consignee and the
expenses incurred to bring the goods in a saleable condition are treated as direct expenses or
non-recurring expenses. These expenses may be incurred either by the consignor or by the
consignee depending upon the terms of the agreement between them.
As these direct expenses are incurred only once, that is, at the time of sending the consignment
these are called non-recurring expenses. These expenses increase the value of the goods and
hence are added to the cost while determining the value of closing stock.
These expenses are paid by the consignor or by the consignee on behalf of the consignor

⮚ Recurring Expense:
All the expenses incurred by the consignor and the consignee which do not increase the
value of goods are called recurring expenses or Indirect expenses. They include
● The expenses incurred by the consignee after the goods reach the premises of the
consignee such as office and administration expenses, storage expenses, selling and
distribute expenses
● Discount on bills (accepted by the consignee) discounted, expenses on goods returned,
etc.
 Examples of various recurring expenses incurred by the consignor and the consignee are
given below:

ACCOUNTING FOR CONSIGNMENT TRANSACTION:

When goods are sent by comment and further said by consignee, it is essential for the
consignor to know the profit or loss made from consignment transactions and the net amount
receivable from the consignee. The consignee would also be interested to know the amount due
from ho the consignor and how much commission he earned after recovering the expenses
incurred by him. For enabling this, accounts have to be prepared in the books of both Consignor
and Consignee. The accounting treatment for consignment transactions hence discussed under
the following heading:
A. Accounting in the books of Consignor.
B. Accounting in the books of Consignee.
A.ACCOUNTING TREATMENT IN THE BOOKS OF CONSIGNOR:
The recording of consignment traction the books of consignor, the accounting treatment. In the
book of Consignee and eliciting of results and required details, depends on whether the goods
are sent by Consignor to Consignee at ‘Cost Price’ or ‘invoice Price’ (i.e.. at a price above cost
price) Hence , the accounting treatment in the books of Consignee is discussed under the
following situations:
● When the goods are sent by consignor to consignee at Cost Price
● When the goods are sent by Consignor to Consignee at invoice Price
(A) WHEN THE GOODS ARE SENT BY CONSIGNOR TO CONSIGNEE AT COST PRICE:
When goods are sent by consignor to consignee at cost price, for ascertaining the results from
consignment; and other details, the following accounts must be prepared:
1. Consignment Account or Consignment Outward Account (separate for each consignment).
2. Goods Sent on Consignment Account.
3. Consignment Stock Account.
4. Consignee’s Account.
Journal Entries:
The following are the various transactions under consignment and the respective entries to be
passed in the books of consignor:
Based on the above entries, the relevant accounts are prepared:
1. Consignment Account:
● It is prepared by the consignor showing all transactions relating to a particular
consignment. The objective of this account is to ascertain net profit/loss arising from
each consignment. Once goods are consigned by the consignor, its cost is debited to
the Consignment Account along with various expenses incurred by the consignor
and the consignee in dealing with that particular consignment. The commission due
to the consignee is also debited to the Consignment Account. When Gel Credre
commission is not paid the bad debts if any are also debited this account. Once the
goods reach the consignee some of these will be untold and the rest said either a
cash or credit.
● Irrespective of the type of sale, the entire sales proceeds will be shown in the credit
side of the Consignment Account. The unsold goods are treated as consignment
stock and credited to this Account. if some goods are found unsuitable for sale, the
consignor will send the back to the consignor and the same will appear on the its
credit side. After all these item recorded, the Consignment Account balanced. The
difference between the debit and credit totals of Consignment Account is regarded
as profit or less which is transferred to the Profit and Loss Account and the
Consignment Account stands closed. It is in fact a nominal account and is just like
Trading and Profit and Loss Account about which you have studied earlier in final
accounts. Therefore, the principles applied to Trading and Profit Loss Account hold
good for this account also. Like Trading and Profit and Loss Account all expenses
and purchases are debited to this account and all sales and incomes are credited.
The proforma of the consignment account is given below:
IN THE BOOK OF CONSIGNOR
dr COSIGNMENT ACCOUNT cr

2. Goods Sends on Consignment Account:

This is a real account. It deals with the gold transferred from the consignor to the consignee and
goods returned by the consignee to the consignor. All the goods consigned the consignor will be
credited to this account and goods returned by the consignee are debited to his account. The
balance represents the cost of goods with consignee for sales, and is transferred to the
‘Treading Account’. The Performa of the goods sent on consignment account is depicted below:
GOODS SENT ON CONSIGNMENT ACCOUNT

Date Particular Amount Date Particular Amou

To consignment account By consignment account

(when goods sent of ( when goods sent of
consignment is returned ) xxx consignment) xxx

To trading account
(for transferring the balance
in the account, at the end of
the financial period) xxx

xxx xxx
 3. Consignment Stock Account:
The account is also opened in the books of consignor to know the quantity of closing
stock with the consignee. Proforma of consignment is stock account is shown below:
CONSIGNEMT STOCK ACCOUNT

4. Consignee's Account:
It is a personal account of the consignee, it is prepared for ascertaining the amount due
from the consignee. The consignee's account is debited with cash and credit sales affected
by the consignee. The various expenses incurred by the consignee, the commission
charged by film as well as the advance remitted by him is credited to this account. This
account usually shows a debit balance indicating the amount due from the consignee.
CONSIGNEE’S ACCOUNT

Date Particular Amount Date Particular Amount

To Balance b/d By bank a/c or bills
(Balance due from receivable a/c
consignee, if any, at the (for advance payment
beginning of the accounting consignee) xxx
period.) xxx
By consignment to a/c
To consignment to a/c (for commission due to the
(for sales reported by consignee) xxx
consignee) xxx
By balance c/d (balance
due to consignee, if any, at
the end of the accounting
period) xxx

xxx xxx
Note: Treatment of Bad Debts: When there are any bad debts on credit sales effected by
consignee, it must be debited to Consignment Account and credited to Consignee Account
However, when the risk of bad debt is borne by the Consignee, bad debts should not be
recorded in the books of consignor.