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ACCOUNTING FOR

CONSIGNMENTS

ACC 106

Consignment
Sometimes, it is economical for manufacturer or
wholesaler to appoint agents to sell goods on behalf
Despatch of goods from
one person to another
person fort the purpose of of selling is termed as
consignment
Goods so sent are termed as goods sent on
consignment
The sender is called consignor and the recipient
consignee
Goods sent to agents remain property of the sending
firm, not the agents.

Main features of
consignment

Consignment of goods is not a sale.


The consignee sells goods at the risk of the
consignor.
The sales proceed belong to the consignor and
the consignee gets commission
The relationship between the consignor and
consignee is that of Principal and Agent

Remuneration to Consignee
A commission is paid to the consignee for
selling goods on behalf of the consignor
If the consignee guarantees collection of all
trade debts, additional commission called
del credere commission is paid
Periodically the consignee sends an
account sale (not an Account real but it is
a statement) to consignor showing sales
made, expenses paid, commission due and
amount remitted or remittable to consignor

A specimen copy of an account sale

Account sale of 100 cases of sports materials sold on behalf of Paul


Date
Dec1
Dec 15

Particulars
40 cases of radio
10 radio
Less: Expenses &Charges:
Carriage
700
Custom duty
2000
Insurance
1300
Selling expenses
500
Less: Commission @5% of sales

Rate
1,200
1,100

Shs

Shs
48,000
11.000

59,000

4,500
2,950

7,450
51,550

Less: Amount remitted by bank draft


Balance due

Signature
Date

20,000
31,550

Important terms
Proforma Invoice: a statement prepared by the
consignor stating the quantity, quality, and price
of goods.
Direct expenses: All expenses till the goods
reach the godown of consignee.
Non recurring nature and increase value of
goods. E.g. freight, carriage, insurance, loading
and unloading charges

Indirect expenses: incurred after the goods


reach consignee godown.
They are of recurring nature and do not
increase the value of goods. E.g. godown rent,
storage charges, advertisement expenses,
salaries of salesmen etc.

Note: Distinction between direct and indirect


expenses is of special importance at the time
of valuation of unsold stock.
Direct expenses form a part of the cost,
therefore, a portion of such expenses is
included in the cost of stock.
Indirect expenses do not form part of the cost
and are, therefore, excluded while valuing
unsold stock

Consignors(the traders)
Records
Consignor usually maintains three
accounts:
Consignment Account
Consignee Account
Goods sent on Consignment account

Consignors(the traders)
Records

For each consignment to an agent a


separate consignment account is opened.
Think of it as a trading profit and loss
account for each consignment
The purpose is to calculate the net profit
or loss on each consignment

1. On sending goods to consignee


With the cost of the goods
Dr. Consignment account
Cr. Goods sent to on Consignment
account (stock a/c)
2. Expenses paid or incurred in connection
with the consignment
Dr. Consignment account
Cr. Cash/bank

Expense of the agent(consignee) and


sales receipt
On receipt of account of sales the consignor enters
those details in his books.
3. With the Sales made by the consignee
Dr. Consignees account
Cr. Consignment account
4. With the expenses incurred by the consignee
Dr. Consignment account
Cr. Consignees account
5. With commission of consignee
Dr. Consignment account
Cr. Consignees account

6. With the money received from consignee


Dr. Cash/Bank
Cr. Consignees account

The balancing figure on the consignment account


is a profit or loss on consignment to be taken to
the main Income Statement
The balance on Goods sent on Consignment
transferred to Income Statement in the
determination of gross profit.

Consignee (the agents) Records


On receiving the consignment, no entry
is made in books of account. The goods
do not belong to the consignee but
consignor. However, a memorandum
record will be made by the consignee,
showing all details of the goods received.
3. With cash from sales of consignment
Dr. Cash/Debtors
Cr. Consignor a/c

Entries to Record Consignments IN


THE BOOKS OF CONSIGNEE contd
2. Payments of consignment expenses
Dr. Consignor account
Cr. Cash/bank account
4. Commission earned
Dr. Consignor account
Cr. Profit and loss account
5. Cash to settle balance shown on account of sale
Dr. Consignors account
Cr. Cash book
(The credit balance on consignor account represents
amount due to the consignor)

Example
Paul of Mwanza, whose financial year ends on
31 December, consigned goods to Anneth, his
agent in Mombasa. All transactions were
started and completed in 2013.
(i) January 15: Paul consigned goods costing
Shs 1,000,000
(ii) February 27: Paul paid carriage to Mombas
Shs 100000

Anneth, the consignee, sends an account


of sales on July 31 when all the goods
have been sold. It shows: Sales amounted
to 1,500,000. Anneth expenses were:
import duty, Shs 50,000, distribution
expenses, 60,000, Commission agreed at
6 percent on sales amounted 90000.
Anneth paid balance owing 1,300,000
Books of Paul

Pauls Books
Consignment to Angel, Mombasa, Kenya2013

2013

Shs

Jan15

Goods sent on cons

Feb28

Bank: carriage

Jul 31

Anneth:

2013

1,000 Jul31

Sales

1,500,

100

Import duty

50

Distribution

60

Commission

90

Profit on consignment
(transferred to P&L)

Shs

200
1500

1500

Goods sent on Consignment


2013
Jan 16 Consignment to
Anneth

1000

Bank
2013
Jul31

Shs 2013
Angel
Feb2
(consignee) 1300 8

Shs
Consignment
to Angel:
carriage

100

2013
Jul31 Sales

Angel (Consignee)
Shs 2013
1500 Jul31 Consignment
Import duty
Distribution
Commission
Bank
1500

Shs
50
60
90
1300
1500

Angels(Consignee)
books
Account of Sales(converted in Tshs)
Angel,
Mombasa,
Kenya.
31 Jul 2013
To

Paul
Mwanza
Sales of goods received on consignment
Less charges: Import duty
Distribution costs
Commission
Bank draft enclosed
300

1,500
50
30
90

200
1,

Paul (Consignor)

2013

Shs 2013

Jul31 Bank:
Import duty
Distribution
Commission
transferred to
P& L
Bank

Jul31
50

Shs
Bank:
Sales

1500

60

90
1300
1500

1500

Bank
2013
Jul31 Paul: Sales

Shs 2013

Shs

1500 Jul31Paul: Import duty

50

Paul: Distribution

60

Paul: To settle account

1300

Profit and loss account (Anneth)


Shs
Commission on consignment
From Anneth
90

Valuation of unsold stock


Unsold stock should be valued, taking into account
all costs incurred by both the consignor and
consignee in connection with the consignment.
The value of this unsold stock should be shown as
a carried down balance on the consignment
account. ( an asset in the statement of financial
position of the consignor)
Value of unsold stock

Cost of the goods (valued @cost/market price whichever is lower)


Add: Proportionate expenses of consignor
Add: Proportionate expenses of consignee (only nonrecurring
expenses of the consignee ie exclude recurring/fixed costs eg Godown rent,
insurance, showroom expenses, selling expenses)

Illustration
Paul consigns 100 radio to Anne. Each radio costs shs 800.
Paul pays the following expenses: Freight 1000, Insurance
400, Carriage 500.
Anne pays the following expenses: Custom duty 2000,
unloading charges 500, godown rent 500, salary to
salesman 500.
Goods reach the godown of consignee.
At the end of the year, 25 radio remained unsold with Anne.
The market value of each radio is 850.

Your required to calculate value of closing stock.

Statement showing Value of


Stock
Particulars

Shs

Cost of 25 radios@800

Shs
20,000

Direct Expenses (i.e. 25/100)


Freight

250

Insurance

100

Carriage

125

Unloading Charges
Custom duty

500

1,100
21,100

Loss Of Goods On Consignment

Goods may be lost, destroyed or


damaged either in transit or in
consignee's store.
Such loss can be divided into two parts:
Normal Loss
Abnormal Loss

Normal Loss
The loss is due to inherent characteristics of
goods. E.g. shrinkage, evaporation, leakage
and pilferage
Such losses form part of cost of goods and no
additional adjustment is required for this
purpose
Quantity of such loss is to be deducted from
the total quantity sent by the consignor.

Is included in the value of goods sold and


closing stock by inflating the rate per unit
Value of closing stock= (Total value of
goods sent/Net quantity received by
consignee) X unsold quantity
Net quantity received = Goods consigned
quantity - Normal loss quantity.

Illustration
Angel consigned 2,000 tones of coal @ shs 50 per
tone Boni.
She paid shs 20,000 as freight.
Due to normal wastage only 1950 tones were
received by Boni.
Boni paid shs 5000 as unloading and carriage
charges.
The goods unsold amount to 650 tones
Your required to calculate the value of unsold stock

Solution
Shs
Cost price of 2000 tonnes of coal @ shs 50 per tone

100,000

Freight paid by consignor

20,000

Unloading and carriage charges paid by consignee

5,000

Total cost

125,00

Cost of 650 tones = 125,000 x 650= Shs 41,667


1950

Abnormal Loss
Loss occurs on account of reasons which are
accidental, or which rarely happened.
They are like theft, riots, accidents, fire,
earthquake etc
Losses could occur in transit or in consignee's
store and solely to be borne by consignor.

The following method should be followed while


valuing abnormal loss:
A) Goods sent on consignment(at cost price) Shs XX
B) Add: Non-recurring expenses:
Consignor's expenses................ Shs XX
Consignee's expenses................ Shs XX
Total cost before abnormal loss A+B..............Shs XX

Value of abnormal loss = (Total cost/Total units


consigned) X abnormal loss units.

If goods are not insured


For recording abnormal loss:
Abnormal loss A/C ...........Dr.
To consignment A/C..Cr.
(With the value of abnormal loss)
For abnormal loss transferred:
Profit and loss A/C........Dr.

To abnormal loss A/CCr.

Abnormal Loss and


Insurannce
On payment of insurance premiun
Consignment a/c.Dr
To bank (or consignee if he paid the premium)
(With premium paid)
On happening of abnormal loss
Abnormal loss..Dr
To consignment account
(With value of abnormal loss)

On admission of claim of Insurance Company


Insurance Company a/cDR
To abnormal loss account
(With amount of claim admitted)
On receipt of claim from insurance Company
Bank a/c..DR
To Insurance Company
(With the amount received)

The balance, if any, in the abnormal loss


represents profit or loss which will be
transferred to profit and loss account
If Profit: Abnormal Loss AccountDR
To Profit and Loss account
If Loss: Profit and Loss Account.Dr
To Abnormal Loss Account