Chapter 4

Consignment Sales
The Meaning of Consignments
The term consignment means transfer of possession of merchandise
from the owner to another person who acts as the sales agent of the
owner. Title to the merchandise remains with the owner, who is called
a consignor; the sales agent who has possession of the merchandise
is called a consignee.

The relationship between the consignor and the consignee is that of

principal and agent, and the law of agency controls the determination
of the obligations and rights of the two parties.

Consignees are responsible to consignors for merchandise placed in

their custody until it is sold or returned. Because consignees do not
acquire title to the merchandise, they neither include it in inventories
nor record trade accounts payable or other liability. The only
obligation of consignees is to give reasonable care to the consigned
merchandise and to account for it to consignors. When the
merchandise sold by the consignee, the resulting trade accounts
receivable is the property of the consignor.

The shipment of merchandise on consignment may be referred to by

the consignor as a consignment out, and by the consignee as a
consignment in.

Distinguishing between a Consignment and a Regular Sales

When merchandise is shipped on consignment:
 Title does not pass and the consignor continues to carry the
consigned merchandise as part of inventories
 No revenue is recognized by the consignor at the time of
shipment

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  The consignor is the owner of any unsold consigned
merchandise

Why consignment sale is preferred from outright sales could be:

 The consignor may be able to persuade dealers to stock the
items on consignment basis than outright purchase
 The consignor avoids the risk inherent in selling on credit to
dealers of questionable financial strength
 The acquisition of merchandise on consignment rather than by
purchase requires less working capital and avoids of the risk of
loss if the merchandise cannot be sold.

Accounting for Consignor and Consignee

Receipt of shipment
The consignee may record receipt of shipments in any of several ways:
 The objective is to create a memorandum record of the
consigned merchandise; no purchase has been made and no
liability exists
 The receipt could thus be recorded:
o By a memorandum notation in the general journal
o By an entry in a separate ledger of consignment
shipments
o By a memorandum entry in a general ledger account
entitled Consignment In- Selam PLC.
Illustration of the third alternative
Consignment In- Selam PLC
Date Explanation Debit Credit Balance
Received 10 TV sets to be sold
for 3,500 each at a
commission
of 10% of selling price

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The journal entries to record the payment of freight costs and sales of
the merchandise by the consignee:
Consignment In- Selam PLC 500
Cash 500
To record payment of freight costs on shipment from consignor
Cash 35,000
Consignment In- Selam PLC 35,000
To record sales of 10 TV sets at 3,500 each
The journal entry to record 10% commission earned
Consignment In- Selam PLC 3,500
Commission Revenue- Consignment Sales 3,500
To record 10% commission earned on TV sets sold
The remittance of cash to the consignor is recorded as debit to the
consignment ledger account and results in closing that account.
Consignment In- Selam PLC 31,000
Cash 31,000
To record payment in full to consignor

The Account Sales

The report rendered by the consignee is called the account sales; it
includes the quantity of merchandise received and sold, expenditures
made, advances made, and amounts owed or remitted. Payments may
be made as portions of the consigned merchandise are sold or may not
be required until the merchandise is sold or returned to the consignor.

Assume that Selam PLC, an importer and whole seller, ships 10 TV

sets to Ahmed Kedir, a retailer in Awassa to be sold at 3,500 each.
Freight costs of 500 are to be reimbursed to Ahmed. Ahmed also
receives a commission of 10% of the selling price. After selling the
merchandise Ahmed sends Selam an account sales similar to the one
below, accompanied by a check for the amount due.
Ahmed Kedir
Awassa

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 Account Sales
Hamle 30, 1999
Sales for account and risk of:
Selam PLC
Addis Ababa

Sales: 10 TV sets @ Br. 3,500 35,000

Charges:
Freight cost 500
Commission (35,000*10%) 3,500 4,000
Balance (remittance to consignor) 31,000
Consigned TV sets on hand none

If merchandise is received on consignment from several consignors, a

Consignments-In controlling account may be used, and a supporting
account for each consignment set up in a subsidiary consignments
ledger.

If the consignee does not measure profits from consignment sales

separately from regular sales, the sale of the consigned merchandise
is credited to the regular sales account. Concurrently, a journal entry
is made debiting Cost of Goods Sold or Purchases and crediting
Consignment In ledger account for the amount payable to the
consignor viz. sales price minus commission. No journal entry is made
for commission revenue as the profit element is measured by the
difference between the amounts credited to sales and debited to cost
of goods sold.
This method looks less desirable in that it does not clearly show gross
profit from consignment sales; but it is the most practical one as it
treats consigned merchandise as purchased upon sales there by
facilitating collection of sales taxes like VAT by the consignee and

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issuance of the consignee’s invoice to recognize the sales. The
consignor also issues invoice to the consignee to this effect.

Accounting for Consignors

When a consignor ships merchandise to consignees, it is essential to
have a record of this portion of inventories. Therefore, the consignor
may establish a Consignment Out account for every consignee (or
every shipment on consignment). The Consignment Out account
represents a special category of inventories.

Separate Measurement of Gross Profit

A separate measurement of gross profit on consignments becomes
more desirable if consignment transactions are substantial in relation
to regular sales as compilation of direct costs may be an expensive
process, especially if the gross profit is computed by individual
consignees or consignments.

Thus, a separation of consignment sales revenue from regular sales

revenue usually is a minimum procedure to develop information
needed by management if consignment sales are an important part of
total sales volume. However, separation of consignment sales from
regular sales is unnecessary if only an occasional sale is made
through consignees.

Accounting for Consignor Illustrated

The choice of accounting method by a consignor depends on whether:
i) Consignment gross profits are measured separately from
those on regular sales?
ii) Sales on consignment are combined with regular sales?

Journal entries required under the two alternatives are illustrated by

taking the data used for the consignee; assume that the cost of TV
sets shipped to Awassa is 2,500 each.

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Upon shipment
The entry to be made under both alternatives would be:
Consignment Out-Ahmed Kedir 25,000

Inventories 25,000

Packing expenses of 300 allocated to consigned merchandise

Alternative i)
Consignment Out-Ahmed Kedir 300
Packing Expense 300
Alternative ii)
No entry required.

Consignment sales of 35,000 reported by consignee

Alternative i)
Cash 31,000
Consignment Out- Ahmed Kedir 500
Commission Expense- Cons Sales 3,500
Consignment Sales 35,000
Cost of Goods Sold 25,800
Consignment Out- Ahmed Kedir 25,800
Consignment sales 35,000
Less: Cost of Cons Sales 25,800
Commission 3,500 29,300
Gross profit on consignment sales 5,700

Alternative ii)
Cash 31,000
Freight Out Expense 500
Commission Expense 3,500
Sales 35,000

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 Cost of Goods Sold 25,000
Consignment Out- Ahmed Kedir 25,000

Included in total sales 35,000

Included in cost of all merchandise sold 25,000
Included in total packing expense 300
Included in total freight out expense 500
Included in total commission expense 3,500

If merchandise is received on consignment from several consignors, a

Consignments-In controlling account may be used, and a supporting
account for each consignment set up in a subsidiary consignments
ledger.

If the consignee does not measure profits from consignment sales

separately from regular sales, the sale of the consigned merchandise
is credited to the regular sales account. Concurrently, a journal entry
is made debiting Cost of Goods Sold or Purchases and crediting
Consignment In ledger account for the amount payable to the
consignor viz. sales price minus commission. No journal entry is made
for commission revenue as the profit element is measured by the
difference between the amounts credited to sales and debited to cost
of goods sold.
This method looks less desirable in that it does not clearly show gross
profit from consignment sales; but it is the most practical one as it
treats consigned merchandise as purchased upon sales there by
facilitating collection of sales taxes like VAT by the consignee and
issuance of the consignee’s invoice to recognize the sales. The
consignor also issues invoice to the consignee to this effect.

Accounting for Consignors

When a consignor ships merchandise to consignees, it is essential to
have a record of this portion of inventories. Therefore, the consignor

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may establish a Consignment Out account for every consignee (or
every shipment on consignment). The Consignment Out account
represents a special category of inventories.

Separate Measurement of Gross Profit

A separate measurement of gross profit on consignments becomes
more desirable if consignment transactions are substantial in relation
to regular sales as compilation of direct costs may be an expensive
process, especially if the gross profit is computed by individual
consignees or consignments.

Thus, a separation of consignment sales revenue from regular sales

revenue usually is a minimum procedure to develop information
needed by management if consignment sales are an important part of
total sales volume. However, separation of consignment sales from
regular sales is unnecessary if only an occasional sale is made
through consignees.

Accounting for Consignor Illustrated

The choice of accounting method by a consignor depends on whether:
iii) Consignment gross profits are measured separately from
those on regular sales?
iv) Sales on consignment are combined with regular sales?
Journal entries required under the two alternatives are illustrated by
taking the data used for the consignee; assume that the cost of TV
sets shipped to Awassa is 2,500 each.

Upon shipment
The entry to be made under both alternatives would be:
Consignment Out-Ahmed Kedir 25,000

Inventories 25,000

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Packing expenses of 300 allocated to consigned merchandise
Alternative i)
Consignment Out-Ahmed Kedir 300
Packing Expense 300

Alternative ii)
No entry required.
Consignment sales of 35,000 reported by consignee
Alternative i)
Cash 31,000
Consignment Out- Ahmed Kedir 500
Commission Expense- Cons Sales 3,500
Consignment Sales 35,000

Cost of Goods Sold 25,800

Consignment Out- Ahmed Kedir 25,800

Consignment sales 35,000

Less: Cost of Cons Sales 25,800
Commission 3,500 29,300
Gross profit on consignment sales 5,700

Alternative ii)
Cash 31,000
Freight Out Expense 500
Commission Expense 3,500
Sales 35,000

Cost of Goods Sold 25,000

Consignment Out- Ahmed Kedir 25,000
Included in total sales 35,000
Included in cost of all merchandise sold 25,000
Included in total packing expense 300

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 Included in total freight out expense 500
Included in total commission expense 3,500

Accounting for Partial Sale of Consigned Merchandise

Continuing the previous illustration, let us assume that four of the ten
TV sets on consignment are sold at the end of the accounting period.
To prepare financial statements, the consignor must determine the
amount of gross profit realized on the sold units and the inventory
value of the unsold units.

Journal entries under the two alternatives:

Consignment sales of 14,000 reported by consignee and payment of
5,000 received. Charges by consignee: freight costs of 500 and
commission of 1,400
Alternative i)
Cash 5,000
Trade Accounts Receivable 7,100
Consignment Out- Ahmed Kedir 500
Commission Expense- Cons Sales 1,400
Consignment Sales 14,000
Cost of Consignment Sales 10,320
Consignment Out- Ahmed Kedir 10,320
2500+30+50=2580*4
Inventories on consignment 15,480
Alternative ii)
Cash 5,000
Trade Accounts Receivable 7,100
Freight Out Expense 500
Commission Expense 1,400
Sales 14,000

Cost of Goods Sold 10,000

Consignment Out- Ahmed Kedir 10,000

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 2500*4
Consignment Out-Ahmed Kedir 480
Packing Expenses (30*6) 180
Freight Out Exp (50*6) 300
Direct costs relating to unsold merchandise
Inventories on Consignment 15,480

Return of Unsold Merchandise by Consignee

Packing and shipping associated with consigned merchandise are
properly included in cost. However, if the consignee for any reason
returns the merchandise to the consignor, the packing and shipping
costs should be recognized as an expense of the current accounting
period. The place utility originally created by these costs is lost when
the merchandise is returned. Any return shipment and repair costs
should also be recognized as expense.

Advances from Consignees

Although cash advances from a consignee are sometimes credited to
the consignment out account, a better practice is to credit a liability
account, Advance from Consignees. The consignment out account
then will continue to show the carrying amount of merchandise on
consignment.

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