Due to increasing size of market, it is quite obvious that manufacturers or whole

sellers cannot approach directly to every customer around the state or nation. To
overcome this limitation, manufacturers normally appoint reliable agents at every
desired location to reach the customers directly. He makes an agreement with local
traders who can sell goods on his behalf on commission basis.

Meaning and Features of Consignment

Consignment is a process under which the owner consigns/handovers his materials
to his agent/salesman for the purpose of shipping, transfer, sale etc.
Following are the points that throw more light on the nature and scope of a
consignment −
 Here, ultimate ownership of the goods remains with the manufacturer or whole seller
who handovers goods to his agent for sale on commission basis. Consignment is merely
a transfer of possession of goods not an ownership.
 Since ownership of goods remain with the manufacturer (consignor), consignee (agent)
is not responsible for any loss or destruction of goods.
 The goods are sold on owner’s risk and hence, profit/loss goes to owner.
 Consignee only gets re-imbursement of expenses incurred by him and commission on
sale made by him, because sale that proceeds, belongs to owner (consignor).

Why is Consignment not a Sale?

Following are the reasons that explain why consignment is not a sale −
 Ownership − Ownership of goods need to be transferred from seller to buyer in case of
sale, but ownership of goods remains with the consignor, till the goods are sold by the
consignee.
 Risk − In case of a consignment, normally, risk remains with the consignor in the event
of goods being lost or destroyed.
 Relationship − The relation between a seller and a buyer will be of debtor and creditor
in case where goods are sold on credit basis. On the other hand, the relationship
between a consignor and a consignee is that of principal and agent.
 Goods Return − Usually, the sold goods cannot be returned back; however, if there is
any manufacturing defect or any other technical fault, seller is obliged to take them
back. On the other hand, consignee may return the unsold stock of goods to consignor
anytime.

Important Terms
Pro-forma Invoice

Invoice implies that the sale has taken place, but pro-forma invoice is not an
invoice. Pro-forma invoice is a statement prepared by the consignor of goods
showing quantity, quality, and price of the goods. Such pro-forma invoice is issued
by the consignor to consignee regarding the goods before the sale actually takes
place.
Account Sale

Statement showing the details of goods received, goods sold, expenses incurred,
commission charged, remittances made, and due balance is called Account Sale
and it is remitted by the consignee to the consignor of goods on a periodic basis.

Commission

There are three types of commission payable to consignee on sale of the goods −
 Simple Commission − This is usually a fixed percentage on the total sale, calculated as
per mutually agreed terms.
 Over-riding Commission − In case of an extra-ordinary sale of the goods, some
specific amount is payable to consignee in the form of an incentive is called overriding
commission. Over-riding commission is also calculated on the total sales.
 Del-credere Commission − “An agreement by which an agent or factor, in
consideration of an additional premium or commission (called a del credere
commission), engages, when he sells goods on credit, to insure, warrant, or guarantee
to his principal the solvency of the purchaser, the engagement of the factor being to pay
the debt himself if it is not punctually discharged by the buyer when it becomes due.”
C. & G. Merriam Co.
A delcredere commission is paid by the consignor to his agent for taking additional
risk of recovery of debts from the consignee on an account of credit sales made by
him (agent) on consignor's behalf.

Direct Expenses

Expenses, which increases the cost of the goods and are of non-recurring nature
and incurred till the goods reach the warehouse of consignee may called direct
expenses.

Indirect Expenses

Warehouse rent, storage charges, advertisement expenses, salaries, etc. comes

under the category of the indirect expenses. The distinctions between direct and
indirect expenses are important especially at the time of valuation of the unsold
closing stock.

Advance

Amount paid in advance by a consignee to consigner as security called as advance.

Valuation of unsold Consignment

Valuation of unsold stock will be done like a closing stock of a Trading concern and
should be valued at the cost or the market price whichever is low. This stock will be
valued at −

 Proportionate cost price and

  Proportionate direct expenses.
Here, proportionate direct expenses mean — all expenses incurred by the
consignor and the expenses of consignee, which are incurred by him till the goods
reach the warehouse.

Invoicing Goods higher than Cost

Under this method, goods are charged at the cost + profit and the pro-forma invoice
also shows this higher price of such goods. To know the actual profit, at the end of
an accounting period, consignment account will be credited with excess price so
charged. Value of the stock will also be adjusted to the extent of profit element.
Main reason to adopt this policy by consignor is −
 To hide actual profit from consignee.
 Valuation of a stock at the consignor’s warehouse is comparatively easy in this case.
 In this case, consignor usually directs consignee to sale goods on invoice price only. It
prevents different sale price to different customers.

Loss of Goods
There may be two types of losses as explained below −
Normal Loss − Normal loss may occur due to inherent characteristics of goods like
evaporation, drying up of goods, etc. It is not separately shown in the consignment
account, but included in the cost of goods sold and the closing stock by inflating the
rate per unit. To calculate the value of unsold stock, following formula is used.
Valueofclosingstock=TotalvalueofgoodssentNetquantityreceivedbyconsignee×Unsoldquantity
Valueofclosingstock=TotalvalueofgoodssentNetquantityreceivedbyconsignee×Unsoldquantity
Netquantityreceived=Goodsconsignedquantity−Normallossquantity
Netquantityreceived=Goodsconsignedquantity−Normallossquantity
Abnormal Loss − An abnormal loss may occur due to any accidental reason. It is
credited to the consignment account to calculate actual profitability. Valuation of
closing stock is done on the same basis as explained earlier i.e. proportionate cost
+ proportionate direct expenses.

Abnormal Loss and Insurance

If, there is an insurance policy in respect of the consigned goods; following entries
will be passed in the books of a consignor −

Sr.No. In the Books of Consignor In the Books of Consignee

1
Payment of Insurance Premium Consignment A/cDr
(a) If insurance premium is paid by the To Cash A/c
 consignor, then cash will be credited. Or
(b) If Insurance premium is paid by the To Consignee A/c
consignee, then consignee’s A/c will be
credited. (Being Insurance premium paid)

2
Abnormal Loss A/cDr
At the time of Abnormal Loss To Consignment A/c
(Being Loss Incurred)

3
Insurance Company (Name of the insurer
A/cDr
Acceptance of Claim by Insurance Company
To Abnormal Loss A/c
(Being claim admitted)

4
Bank A/cDr
On receipt of Claim To Insurance Company A/c
(Being amount of claim received)

5
Profit & Loss A/cDr
In Case of Loss To Abnormal Loss A/c
(Being amount of Abnormal Loss transferred)

Summary of Accounting Entries

Following Accounting Entries (Except for Loss) will be done in the books of
consignor and consignee for transactions related to the consignment −

Sr.No. In the Books of Consignor In the Books of Consignee

1
When goods are sent to the consignee
Consignment A/cDr
No need to do any Entry in this case
To Goods Sent on Consignment A/c
(Being Goods Sent on Consignment)

2 Not Applicable
Expenses Incurred by Consignor
Consignment A/cDr
To Cash/Bank A/c
 (Being Expenses incurred on consignment)

3
Advance given by consignee
Consigner A/cDr
Cash/Bank A/cDr
To Bank/Cash A/c
To Consignee’s A/c
(Being Advance amount paid to Consignor)
(Being advance received from consignee)

4
Expenses Incurred by Consignee Consigner A/cDr
Consignment A/cDr To Bank/Cash A/c
To Consignee’s A/c (Being Expenses incurred on good
(Being Expenses incurred by consignee) received on consignment)

5
Sale by Consignee Cash (for cash sale) A/cDr
Consignee’s A/cDr Debtors (for Credit Sale) A/c Dr
To Consignment A/c To Consignor A/c
(Being Expenses incurred by consignee) (Being goods sold)

6
Commission to Consignee
Consigner A/cDr
Consignment A/cDr
To Commission A/c
To Consignee’s A/c
(Being Commission earned)
(Being Commission on sale due to consignee)

7
Remittance from Consignee Consigner A/cDr
Cash/Bank A/cDr To Bank/Cash A/c
To Consignee’s A/c (Being Balance due Payment made to
(Being due amount received from consignee) consignor)

8
Entry for Profit on Consignment
Profit & Loss A/cDr
Not Applicable
To Consignment A/c
(Being Profit earned on consignment)

9
Loss on Consignment Not Applicable
Consignment A/cDr
To Profit & Loss A/c
 (Being Loss incurred on Consignment transferred to
the profit & Loss Account)

Note − The goods sent on consignment account will be closed by transferring

balance into the Purchase account or the Trading account.

1,000 toys consigned by Roy & Co. of Calcutta to T. Nu of Rangoon

at an invoice cost of Rs 150 each. Roy & Co. paid freight Rs 10,000
and insurance Rs 1,500. During the voyage 100 toys were totally
damaged by fire and had to be thrown overboard. T. Nu took
delivery of the remaining toys and paid Rs 14,400 as customs duty.

ADVERTISEMENTS:

T. Nu sent a bank draft to Roy & Co. for Rs 50,000 as advance

payment and later sent an account sales showing that 800 toys had
been sold at Rs 220 each. Expenses incurred by T. Nu on godown
rent and advertisement, etc., amounted to Rs 2,000 T. Nu was
entitled to commission of 5 per cent. One of the credit customers
could not pay for 5 toys. Prepare the Consignment Account, T. Nu’s
account and Profit and Loss Account in the books of Roy & Co.,
assuming that nothing has been recovered from the insurers due to
a defect in the policy. T. Nu settled his account immediately.
In the books of Roy & Co.
10000 + 1500 = 11500/1000*100 = 1150

14400 * 100/900 = 1600

 In the books of Jamshed & Co. of Mumbai
Consignment to Kolkata A/c
Particular Amt Particular Amt
To goods sent on 40000 By Mukherjee Co.
Consignment A/c 100*145 = 14500
To Cash A/c 600 150*140 = 21000 35500
To Mukherjee Co. A/c By Consignment
Com 725 stock 15225
Exp 375
Com 1050
Exp 290 2440
To profit on
Consignment A/c 7685
50725 50725

Closing stock = 400 – 100 – 150 = 150

Consignment stock
Cost price = 150 * 100 = 15000
Exp = 600 * 150/ 400 = 225
Total = 15225
Mukherjee Co. A/c
Particular Amt Particular Amt
To Consignment to By Consignment to
Kolkata A/c 35500 Kolkata A/c 2440
By Bank A/c (Bal fig) 33060
35500 35500
 In the books of Hitkari potteries ltd of Ghaziabad
Consignment to Agra A/c
Particular Amt Particular Amt
To goods sent on 16000 By Bawa ltd A/c (150*90) 13500
consignment A/c By Insurance claim A/c 700
To Cash A/c 700 By p & l A/c 970
To Bawa ltd A/c By consignment stock A/c 2540
Octroi 200 By loss on Consignment A/c 233
Carriage 30
Com 1013 1243

17943 17943

Abnormal loss = 20 * 80 = 1600

Exp = 700 * 20/200 = 70
1670
Abnormal loss = 16000 + 700 *20 = 1670
200
P & l = 1670 – 700 = 970
Closing stock = 200 – 150 – 20 = 30
Consignment stock = 16000 + 700 + 230 *30 = 2540
200
Bawa ltd A/c
Particular Amt Particular Amt
To consignment to 13500 By consignment to 1243
Agra A/c Agra A/c
To Insurance claim 700 By Bank A/c (Bal fig) 12957
14200 14200