Consignment Accounting
Every manufacturer of a product usually prefers to sell his/her product with the help of Intermediate person. who is commonly known as a distributor. Most of the transactions are dependent upon the profitability of that product to a specific intermediate .
In the case of Consignment the process of sale is the same but, the intermediate here is not a wholesaler or retailer he is considered as Agent and called as Consignee who works on purely commission basis . There are two parties in this contract. One is consignor (Principal) and another is Consignee (Agent) the goods sent to consignee by the consignor for the purpose of sale whereas the ownership of the product remains with the Consignor. Consignee has no right to keep the goods with him without the due consent of the consignor. consignee use to do all the activities related to possess the goods and maintain their value, such expenses may be recurring or non recurring in nature. a consignee is entitled to get commission on the activities he undertakes.
Consignor sends a proforma invoice to the consignee which includes the details of the goods sent and the price of the product. Consignee sends Account sales to the consignor which contains
Consignment means to consign. The process of sending goods from one person (Owner) to another person (Agent) for the purpose of sale. The agent will be entitled for commission which is agreed by both the consignor (principal) and the consignee (agent). the consignee sends statement of account to the consignor for the purpose of providing complete information of transactions done by him.
Expenses incurred
All the expenses incurred on consignment are categorized in two main groups
Recurring Expenses: These expenses are also known as Indirect expenses which are incurred to the consignee after reaching the product to him. These expenses are the expenses which occur for maintenance of the goods by consignee. e.g. godown rent
Nonrecurring Expenses: These expenses are known as Direct expenses. This includes the expenses which occur only once in the entire period of consignment is termed as “Non-recurring expenses” these expenses may incur to both consignee and consignor. e.g. Insurance, Freight “ These expenses must not be repeated.”
Features of consignment
There are two parties one is consignor and another is consignee.
Possession of goods with consignee but the ownership remains with consignor.
Consignee has to sell goods on behalf of manufacturer
a consignee has a right to reimbursed the expenses incurred by him for maintaining goods.
The unsold stock belongs to the consignor not consignee.
The consignee gets commission not share in profit.
Del-credere commission is given to credit sale by consignee. Consignor sends proforma invoice
Consignee sends Account sales
Important terms of consignment account
Consignor:
He is the person who sends goods to agents (consignee) e.g. a manufacturer or wholesaler.
Consignee:
He is the person to whom goods are sent by consignor for sale.
Commission
In consignment accounting consignee is entitled to get commission of sale of goods. The commission depends upon the nature of sales or transaction. If a consignee sales goods on credit he will get del-credere commission and for other cash transactions he gets Normal commission. sometimes a consignee takes extra efforts for the effective recovery and increasing the sale of the product. The consignor may grant a special commission which is known as an overriding commission. Hence there are three types of commission
Normal commission :
This is a commission which is given to the consignee for selling goods and possessing goods and also maintaining them. After a sale of goods, the consignee is entitled to earn this commission only on the cash sale not credit sales. The rate of commission is already prescribed in consignment.
Delcredere commission
This commission is given by the consignor to the consignee for taking responsibility of collecting an amount from costumes for which a credit sale is made by him. This commission has a relatively higher rate of commission than normal commission. here a consignee has to bear losses of non collection of credit sale amount or any Bad debts occurs. The loss of dad debts is consignees loss not consignors loss. It is calculated on total sales not only on Credit sales. Naturally, if debt is found to be irrecoverable the same must be borne by the consignee. There will be no effect in the books of the consignor. In short, credit sales will be treated as cash sales to the consignor. If no Del credere commission is given by the consignor to the consignee, the amount of Bad debts must be borne by the consignor.
Special or Overriding commission
Overriding commission is a type of commission which a consignor grats to the consignee who archives a specific sales target or whose total sales revenue exceeds a specified amount. It encourages consignees to realize the best possible price for goods sold. Sometimes it is given to a consignee as an incentive for putting in his efforts to introduce, promote and create a market for a new product in certain areas. Overriding commission is an extra commission which is awarded to the consignee in addition to his ordinary or regular commission.
It is an extra commission allowed over and above the normal commission is generally offered for the following reasons :
(i) When the agent is required to put in hard work in introducing a new product in the market.
(ii) Where he is entrusted with the work of supervising the performance of other agents in a particular area.
(iii) For effecting sales at prices higher than the price fixed by the consignor.
Proforma Invoice:
When a consignor sends goods to the consignee he sends only a proforma invoice and not an invoice. A proforma invoice looks like an invoice but is really not one. The objective of the proforma invoice is only to convey information to the consignee regarding quantity, varieties and prices of goods sent and expenses incurred and not to make him liable like a trade debtor.
Account Sales:
This is a periodical statement prepared by consignee to be sent to the consignor giving details of all sales (cash and credit), expenses incurred and commission due for sales, destroyed-in-transit or in godown and deducting the amount of advance remitted by him.
Operating Cycle of Consignment Arrangement
(i) Goods are sent by consignor to the consignee.
(ii) consignor will incur expenses for sending the goods to consignee.
(iii) Consignee may pay some advance or accept a bill of exchange.
(iv) Consignee will incur expenses for selling the goods.
(v) Consignee maintains records of all cash and credit sales.
(vi) Consignee prepares a summary of results called Account sales.
(vii) Consignor pays commission to the consignee.
Sometimes, the consignor may send the goods at a price higher than cost so that the consignee gets no knowledge of the real cost of goods which is confidential for the consignor.
Accounting of consignment
The consignor and the consignee do not have restrictions to have more than one such contracts. consignor may have many consignees and the may have many consignors or he may take a responsibility of many consignors. For any particular contract the consignor and the consignee of that contract may prepare separate accounts.
Consignor prepares 1) Consignment Account 2) Consignee account
consignee is not liable for the goods in his hand his liability occurs when he sales goods. hence he prepares the ledgers.
Journal Entries:
consignor passes the journal entries in his books as follows:
Journal entries In the books of consignor
1.when goods sent on consignment
Consignment A/c Dr
To Goods sent on consignment A/c
2.Expenses incurred by consignor
Consignment A/c Dr.
To Cash/Bank/Creditors for Expenses A/c
3.For advance received from consignee
Cash/ Bank/ Bill Receivables A/c Dr.
To Consignee’s Personal A/c
4.On expenses incurred by consignee
Consignment A/c Dr.
To Consignee’s Personal A/c
5.On consignee reporting sales
Consignee’s Personal A/c Dr.
To Consignment A/c
6.For commission due
Consignment A/c Dr.
To Consignee’s Personal A/c
7.For Bad Debts
Consignment A/c Dr.
To Consignee’s Personal A/c
8.For closing the consignment account
For profit :
Consignment A/c Dr.
To General Profit and Loss A/c.
For Loss:
General Profit and Loss A/c Dr.
To Consignment A/c
9.For the final settlement
Cash/ Bank/ B/R A/c Dr.
To Consignee A/c
10.For closing the Goods Sent on Consignment Account
Goods sent on Consignment A/c Dr.
To Trading/ Purchases A/c
11.On closing stock
Stock on Consignment A/c Dr.
To Consignment A/c
12.When Del Credere Commission is given
(i) For Credit Sales –
Consignee’s Personal A/c Dr.
To, Consignment A/c
(ii) For Bad Debts – No Entry
(iii) For Del Credere Commission —
Consignment A/c Dr.
To, Consignee’s Personal A/c
13.When Del Credere Commission is not given
(i) For Credit Sales –
Consignment Debtors A/c Dr.
To, Consignment A/c
(ii) For Bad Debts –
Consignment A/c Dr.
To, Consignment Debtors A/c
(iii) (a) For realization of Cash —
Cash A/c Dr.
To, Consignment Debtors A/c
( if collected by Consignor)
(b) Consignee’s Personal A/c Dr.
To, Consignment Debtors A/c
(if collected by Consignee)
Journal entries in the books of consignee
1.when goods sent on consignment
No Entry
2.Expenses incurred by consignor
No Entry
3.For advance received from consignee
Consignor’s Personal A/c Dr.
To Cash/ Bank/ Bills Payable A/c
4.On expenses incurred by consignee
Consignor’s Personal A/c Dr.
To Cash/ Bank/ Creditors for expenses A/c
5.On consignee reporting sales
Cash/ Bank/ Consignment Debtors A/c Dr.
To Consignor’s Personal A/c
6.For commission due
Consignor’s Personal A/c Dr.
To Commission A/c
7.For Bad Debts
Consignor’s Personal A/c Dr.
To Consignment Debtors A/c
8.For closing the consignment account
No entry
9.For the final settlement
Consignor A/c Dr.
To Cash/ Bank/ B/P A/c
10For closing the Goods Sent on Consignment Account
No entry
11.On closing stock
No entry
12.When Del Credere Commission is given
(i) For Credit Sales –
Consignment Debtors A/c Dr.
To, Consignor A/c
(ii) For Bad Debts –
Bad Debts A/c Dr.
To, Consignment Debtors A/c
(iii) For realization of cash from cash from Debtors —
Cash/ Bank A/c Dr.
To, Consignment Debtors A/c
(iv) For Closing Bad Debts A/c-
Commission Received A/c Dr.
To, Bad Debts A/c
13.When Del Credere Commission is not given
NO Entry
Valuation of Stock
If a part of the goods remain unsold its value must be inserted and credited to consignment account so that this account shows profit on that part of the goods which has actually been disposed off.
the question of valuation of unsold stock may be discussed under two heads:
1) When whole of the stock remain unsold and
2) When a part of stock remain unsold
the fundamental rule for the valuation of the unsold stock is the cost or market price whichever is lower. (This is based on the convention of conservatism)
1) When the whole of the stock remain unsold
In the case the balance of the consignment account will represent the value of the goods lying with the consignee, and will be shown in the balance sheet as an Asset under heading stock on consignment. If however the loss is anticipated adequate previsions should be made therefore. This can be done by debiting anticipated loss to profit and loss account and crediting a new account called reserve for loss on consignment account which would be shown as a deduction from the value of stock on consignment on the asset side of the balance sheet.
2) When only a part of stock remain unsold
When only a part of the stock has been sold at the date on which the account sales is received or when the books are balanced, the consignment account should be credited with the value of unsold stock. This value is the cost of the goods and due proportion of the expenses incurred by the consignor and the consignee on the whole lot of the goods. These expenses include
Ø Freight,
Ø Cartage, and
Ø Insurance in transit,
Ø Dock due,
Ø Clearing charges or custom duties
Landing charges
So far as the consignors expenses are concerned they usually relate to whole consignment but so far as the consignees expenses are concerned all those expenses incurred on whole lot of the goods must be taken into account (all expenses which are relate solely to the goods sold must be ignored) when valuing the stock. After calculating the total expenses incurred by the consignor and the consignee on the whole lot these can be apportioned between sold and unsold stock. If these consignment expenses are not thus apportioned there would arise an inequitable position as regard the ascertainment of the correct amount of profit or loss.
These are the some expenses which incurred while the consignment is being disposed of, but which do not increase the value of the goods example of such expenses are:
Ø Godown rent
Ø Insurance of Godown
Ø Advertisement
Ø Salaries of salesman
At the time of valuation of unsold stock such expenses are not taken into account
Note:
Ø In examination questions in the absence of the nature of the expenditure incurred by the consignor or consignee you are advised to include the due proportion of the expenses of consignor only.
Ø If the value of the unsold stock (i.e. cost plus proportionate expenses) is more than the market value of the unsold stock the unsold stock is valued at market price.