CONSIGNMENT ACCOUNTS

Consign
Send / Give over to another for care or safekeeping.

Consignment
The delivery of goods for sale or disposal. The method of doing
business, where M/s Maruthi Steel Traders were selling stock on behalf
of Innova Steels is called "Consignment". The act of sending goods is
called Consigning.

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Objectives of Consignment:

•The basic objective of business is to make profits.

•Growth is one another objective of business.

•Even in targeting growth/expansion, their

objective is to bring in a growth in overall profits.

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 Sale Consignment
Ownership Transferred to the buyer along with the Property of the consignor (seller)
transfer of goods. until consigned inventory is sold by
the consignee (reseller).

Goods sold on credit Buyer is a debtor of the seller. Consignee is a debtor of the
Debtor-creditor relationship. consignor.
Agent-principal relationship.

Return of goods Buyer cannot return goods unless they Can be returned to seller (consignor)
are defective or seller agrees to take because consigned inventory is
them back. property of the consignor until it is
sold by the consignee.

Goods lost after delivery Buyer’s loss. Seller’s (consignor’s) loss.

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Consignor:
The person sending the goods is called the "Consignor" (M/s Innova Steels
here)

Consignee:
The person receiving the goods and selling them is called the "Consignee"
(M/s Maruthi Traders here).

Consignor has ownership and risk in the goods

The ownership and thereby risk in the total stock is with the Consignor.
The consignee holds the goods on behalf of the consignor. The consignor is
responsible for the acts of the consignee in his status as an agent.

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Proforma Invoice:
• When the consignor sends the goods to the consignee, he forwards
a statement showing the particulars such as quantity, quality, price of
goods etc.

•It is prepared and forwarded by consignor to consignee.

•It is sent only once, when goods are sent on consignment. 

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Consignor has ownership and risk in the goods
The ownership and thereby risk in the total stock is with the Consignor. The
consignee holds the goods on behalf of the consignor. The consignor is
responsible for the acts of the consignee in his status as an agent.

Consignee is the Agent

The consignee acts as the agent of the consignor only. The Consignee sells goods
on behalf of the consignor and receives commission for his efforts. Any
incidental expenses on the sale are to be reimbursed by the consignor or as
agreed between them.

Relationship between Consignor and Consignee is Principal - Agent

relationship
The Consignee acts in the status of an agent to the consignor, i.e. the
relationship between the "Consignor" and the "Consignee" is that of "Principal
and Agent". The transactions between them are governed by the agreement
made between them as well as by the provisions of "The Law of Agency".

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Account Heads in Consignor Books:
The account heads that are to be newly created in the books of the
consignor are :
1.Consignment a/c – Nominal Account

2.Consignee a/c – Personal Account

3.Goods Sent on Consignment a/c – Nominal Account

4.Stock on Consignment a/c – Real Account

5.Consignment Debtors a/c – Personal Account

6.Stock Reserve a/c – Special Nominal Account

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Account Sales:

An account sales is a statement of affairs relating to the consignment.

Account Sales as sent to "the consignor" by "the consignee" for the sales made on
consignment .

This is a statement prepared and sent by the consignee to the consignor to keep
him informed of the transactions of the business.

It is a periodic statement i.e. it is made for a certain period with a starting date and
an ending date.

The details in the account sales form a basis for accounting for the transactions at
the consignees end.

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 Account Sales as received from M/s Maruthi Traders of Vijayawada
For the sales made on consignment for the period from ____ to _____
Amount Amount Amount
Particulars (in Rs) (in Rs) (in Rs)
Gross Sale Proceeds:      
Cash Sales      

1. xx    

2. xx xxxx  

Credit Sales      

1. xx    

2. xx xxxx  

Total Sale Proceeds   xxxx  

Other Receipts [Note (1)]      

1. xx    

2. xx xxxx  

Total Receipts     xxxx

Less: Amounts to be deducted      

Advances Sent [Note(2)]      

1. xx    

2. xx xxxx  

Expenses paid to be reimbursed [Note(3)]      

1. xx    

2. xx xxxx  

Commissions receivable [Note(3)]      

1. xx    

2. xx xxxx  

Total Deductions     xxxx

Gross Amount Due     xxxx

Less: Bad Debts (Consignor's responsibility) [(4)]     xxxx

Net Amount Due     xxxx

Less: Amounts still to be collected [(5)]MK

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(Balance due from Consignment Debtors)
Stock Valuation:
1.Value of Stock while in transit = Cost of Stock + Consignors Direct Expenses

2.Value of Stock just before being unloaded at the consignees godown

      = Cost of Goods + Consignors Direct Expenses + Proportionate Consignee
Direct Expenses

3. Value of Stock after being placed in the consignees godown

      = Cost of Goods + Consignors Direct Expenses + Proportionate Consignee
Direct Expense

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Losses
Losses are classified based on their nature into two types: (a) Normal and (b)
Abnormal.

Normal Loss
Those losses whose occurrence is inevitable i.e. which occur on account of
normal reasons are normal losses.

Abnormal Loss
Those losses whose occurrence can be avoided i.e. which occur on account of
abnormal reasons are abnormal losses.

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Identifying whether a loss is Normal or Abnormal
A loss being normal or abnormal is dependent on the particular context and the
goods in consideration. To test whether a loss is Normal or Abnormal, the question
we need to consider is "If we take up this activity again, will we come across this
loss for sure?". If the answer is in the affirmative (i.e. yes), then the loss is a normal
loss otherwise it is an abnormal loss.

A loss that occurs every time an act is carried on is a normal loss.

A loss that does not occur every time the same act is carried on but
only has a chance of occurrence is an abnormal loss .

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Consignee Commission :
The consignee selling the goods on consignment basis is entitled, as remuneration, to
a commission on sales.
This commission may take different forms depending on the agreement between the
Consignor and the Consignee.
1.Ordinary Commission
This is the most common form of commission that we come across in consignment
accounting.
2. Del Credere Commission :
An agreement by which an agent, when he sells goods on credit, engages, to insure,
warrant, or guarantee to his principal the solvency of the purchaser, in consideration
of an additional premium or commission (called a del credere commission).
3.Overriding Commission:
A commission paid to general agents or agency managers in addition to the
commission paid to the soliciting agent or broker. [This term has its roots in
insurance]
4.Special Commission:
As the name signifies, this indicates any other type of special commissions that the
consignor may agree to pay the consignee.
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Non-recurring expenses:
These expenses are not incurred again and again, but once. These
expenses are incurred in transferring goods from consignor’s
godown to consignee’s godown. These expenses are considered in
Valuation of Unsold Stock.
               
Recurring expenses :
These expenses are incurred again and again. These expenses are
incurred by the consignee after the goods reach his godown. These
expenses are not considered in Valuation of Unsold Stock.
Examples of such expenses are godown rent, insurance godown,
advertisement, salaries of salesmen, etc

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 Accounting Entries in the Books of Consignor:

(1) On dispatch of goods:-  

  Consignment account----------Dr.
(With the cost
of goods)
       To Goods sent on consignment account

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(2) On payment of expenses on dispatch:-  
  Consignment account----------Dr. (With the
amount spent
       To Bank account as expenses)
 
(3) On receiving advance:  
  Cash or bills receivable account----------Dr. (With the
amount cash or
       To Consignee's personal account
bill)
 
(4) On the consignee reporting sale (as per A/S):-  
(With gross
  Consignee's personal account----------Dr. proceeds of
sales)

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(5) For expenses incurred by the consignee (as per A/S):-  
(With the
Consignment account ----------Dr. amount of
expenses)
 
     To Consignee's personal account

 
(6) For commission payable to the consignee:-
(With the
Consignment account----------Dr. amount of
expenses)
     To Consignee's personal account

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The entry in case of profit is:
 

Consignment account----------Dr.    

     To profit and loss account    

In case of loss the entry is:

 
Profit and loss account----------Dr.  

     To Consignment account  

Note: The goods sent on consignment account may be closed by a transfer to trading account.
 

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When Consignment is Partly Sold:
When all the goods sent on consignment have not been sold, the value of unsold
goods in the hands of the consignee must be ascertained and the profit or loss
should be found out by taking this stock into account. The entry is:
 

Stock on consignment account----------Dr.  

     To Consignment account  

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Invoicing Goods Higher than Cost in Consignment:

(1)On sending goods at invoice price i.e., higher than cost:-

Consignment Account------------ Dr
To Goods Sent on Consignment Account Cr. 
 
(2) The stock in hand at the end of the year (unsold stock) with the consignee will be
valued according to the invoice price plus the share of expenses.
The usual entry is:-
Stock on Consignment Account--------- Dr.
To Consignment Account

(3) As the stock should not be shown at more than cost, therefore, the difference in
entry No. 3 above will be calculated and the following entry will be passed:

Consignment Account---------------- Dr.

To Stock Reserve Account Cr.

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Journal entries for abnormal loss
a. If there is no insurance coverage for the goods sent on consignment:
Abnormal loss A/C ...............Dr.
To consignment A/c

General profit and loss A/C............Dr.

To Abnormal loss A/C

b. If there is policy coverage for the goods sent on consignment:

Abnormal loss A/C ..................Dr.
To consignment A/C

Bank A/C..................Dr.
General profit and loss A/C..........Dr.
To Abnormal loss A/c

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