49 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.

49

UNIT - 3 CONSIGNMENT
LEARNING OUTCOMES
After studying this unit, you would be able to:
 Understand the special features of consignment business, meaning of the terms consignor and
consignee.
 Analyse the difference between the two transactions – sale and consignment and understand that why
consignment is termed as special transaction.
 Practice the accounting treatments for consignment transactions and events in the books of consignor
and consignee.
 Note the variations in accounting when goods are sent at cost and goods are sent above the cost.
 Learn the technique of computing value of consignment inventory lying with the consignee and also the
amount of inventory reserve in it.
 Learn the technique of computing cost of abnormal loss and treatment of insurance claim in relation to
it.
 Understand the distinction between ordinary commission, del-credere commission and over-riding
commission paid to the consignee.
 See the variation of accounting treatment for bad debts when consignee is paid ordinary commission
and when consignee is paid del-credere commission in addition to it.
 Understand the reason of including/excluding various expenditures to cost while valuing the goods
returned by the consignee.

UNIT OVERVIEW

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6.50 PRINCIPLES AND PRACTICE OF ACCOUNTING

3.1 MEANING OF CONSIGNMENT ACCOUNT

To consign means to send. In Accounting, the term “consignment account” relates to accounts dealing with a
situation where one person (or firm) sends goods to another person (or firm) on the basis that the goods will be
sold on behalf of and at the risk of the former. The following should be noted carefully:
(i) The party which sends the goods (consignor) is called principal.
(ii) The party to whom goods are sent (consignee) is called agent.
(iii) The ownership of the goods, i.e., the property in the goods, remains with the consignor or the principal
– the agent or the consignee does not become their owner even though goods are in his possession. On
sale, of course, the buyer will become the owner.
(iv) The consignor does not send an invoice to the consignee. He sends only a proforma invoice, a
statement that looks like an invoice but is really not one. The object of the proforma invoice is only to
convey information to the consignee regarding particulars of the goods sent.
(v) Usually, the consignee recovers from the consignor all expenses incurred by him on the consignment.
This however can be changed by agreement between the two parties.
(vi) It is also usual for the consignee to give an advance to the consignor in the form of cash or a bill of
exchange. It is adjusted against the sale proceeds of the goods.
(vii) For his work, the consignee receives a commission calculated on the basis of gross sale. For ordinary
commission the consignee is not responsible for any bad debt that may arise. If the agent is to be made
responsible for bad debts, he is to be paid a commission called del-credere commission. It is calculated
on total sales, not merely on credit sales until and unless agreed.
(viii) Periodically, the consignees ends to the consignor a statement called Account Sales. It sets out the
sales made by the consignee, the expenses incurred on behalf of the consignor, the commission earned
by the consignee and the balance due to the consignor.
(ix) Firms usually like to ascertain the profit or loss on each consignment or consignments to each consignee.
Consignment Account relates to accounts dealing with such business where one person sends goods to another
person on the basis that such goods will be sold on behalf of and at the risk of the former.

3.2 DISTINCTIONS
3.2.1 CONSIGNMENT AND SALE
S.No. Consignment Sale
1. Ownership of the goods rests with the consignor The ownership of the goods transfers with the
till the time they are sold by the consignee, no transfer of goods from the seller to the buyer.
matter the goods are transferred to the
consignee.
2. The consignee can return the unsold goods to Goods sold are the property of the buyer and
the consignor. can be returned only if the seller agrees.

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51 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.51

3. Consignor bears the loss of goods held with the It is the buyer who will bear the loss if any, after
consignee. the transfer of goods.
4. The relationship between the consignor and the The relationship between the seller and the
consignee is that of a principal and agent. buyer is that of a creditor and a debtor.
5. Expenses done by the consignee to receive the Expenses incurred by the buyer are to be borne
goods and to keep it safely are borne by the by the buyer itself after the transfer of goods.
consignor unless there is any other agreement.

3.2.2 DISTINCTION BETWEEN COMMISSION AND DISCOUNT

Commission Discount
Commission may be defined as remuneration of The term discount refers to any reduction or
an employee or agent relating to services rebate allowed and is used to express one of the
performed in connection with sales, purchases, following situations:
collections or other types of business An allowance given for the settlement of a debt
transactions and is usually based on a before it is due i.e. cash discount.
percentage of the amounts involved. An allowance given to the whole sellers or bulk
Commission earned is accounted for as an buyers on the list price or retail price, known as
income in the books of accounts, and trade discount. A trade discount is not shown in
commission allowed or paid is accounted for as the books of account separately and it is shown
an expense in the books of the party availing by way of deduction from cost of purchases.
such facility or service.

3.3 ACCOUNTING FOR CONSIGNMENT TRANSACTIONS AND

EVENTS IN THE BOOKS OF THE CONSIGNOR
For ascertaining profit or loss on any transaction (or series of transactions) there is one golden rule; open an
account for the transaction (or series of transactions) and (i) put down the cost of goods and other expenses
incurred or to be incurred on the debit side; and (ii) enter the sale proceeds as also the cost of goods remaining
unsold on the right hand side or the credit side. The difference between the total of the two sides will reveal profit
or loss. There is profit if the credit side is more.
The consignor often dispatches goods to various consignees and he would be interested to ascertain the profit
or loss from each consignment separately. Therefore, a separate consignment account has to be prepared for
each consignment. Each consignment account is a nominal-cum-personal account and constitutes a profit an
loss account in respect of the transactions to which it relates.
The consignor records the following transactions in his book of accounts:
1. When goods are consigned or dispatched: it is to be reiterated that when goods are sent to the
consignee, the transaction does not result in a sale and only the possession of the goods changes.
Therefore, the personal account of consignee is not debited and also sales account is not credited. The
following entry is recorded by the consignor:
Consignment (say to Star trading) Account Dr.
To Goods Sent on Consignment Account

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6.52 PRINCIPLES AND PRACTICE OF ACCOUNTING

2. Expenses incurred by consignor: when consignor incurs some expenses relating to the consignment
following entry is recorded:
Consignment (say to Star trading) Account Dr.
To Supplier Account/Bank/Cash
Unlike normal practice to debiting expense accounts first and then transferring to profit and loss account,
expenses are directly debited to consignment account.
3. When advance is received from the consignee: The consignee may remit some advance to consignor.
The following entry is recorded:
Bank/Cash Account Dr.
To Consignee’s Personal Account
4. On receipt of account sales from the consignee: Account sales contains details of sales made by
consignee, expenses incurred by consignee. Following entries are recorded
For sales proceeds
Consignee’s Personal Account Dr.
To Consignment Account
For expenses incurred by consignee
Consignment Account Dr.
To Consignee’s Personal Account
5. Cash or cheque or bank draft or bill of exchange/promissory note received from the consignee as
settlement:
Cash/Bank/Bills Receivable Account Dr.
To Consignee’s Personal Account
6. For bad debts: The accounting entry for bad debts will depend on whether del-credere commission is
paid to the consignee
i. When del-credere commission is not paid to the consignee
Consignment Account Dr.
To Consignee’s Personal Account
ii. When del-credere commission is paid to the consignee
No entry is recorded as bad debts is to be borne by consignee.
7. For the goods taken over by the consignee
Consignee’s Personal Account Dr.
To Consignment Account

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53 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.53

8. For unsold consignment stock: In case some of the goods sent on consignment are still unsold at the
time of preparing final accounts, the unsold inventory is recorded as consignment stock with following
entry:
Consignment Stock Account Dr.
To Consignment Account
9. For commission payable to consignee
Consignment Account Dr.
To Consignee’s Personal Account
We shall illustrate the scheme of entries on the basis of the following information:

ILLUSTRATION 1

Exe sent on 1st July, 2019 to Wye goods costing ` 50,000 and spent ` 1,000 on packing etc. On 3rd July, 2019,
Wye received the goods and sent his acceptance to Exe for ` 30,000 payable at 3 months. Wye spent ` 2,000
on freight and cartage, ` 500 on godown rent and ` 300 on insurance. On 31st December, 2019 he sent his
Account Sales (along with the amount due to Exe) showing that 4/5 of the goods had been sold for ` 55,000.
Wye is entitled to a commission of 10%. One of the customers turned insolvent and could not pay ` 600 due from
him. Show the necessary journal entries in the books of consignor. Also prepare ledger accounts.

SOLUTION

Journal Entries in the books of Consignor

` `
1 Open Consignment Account and debit it with the cost of goods
and credit it with “Goods sent on Consignment Account”.
1/7/2019 Consignment to Wye A/c Dr. 50,000
To Goods Sent on Consignment A/c 50,000
2 For the expenses incurred by the consignor, debit Consignment
Account and credit cash or Bank, as the case may be.
1/7/2019 Consignment to Wye A/c Dr. 1,000
To Bank A/c 1,000
3 If the consignee sends an advance, debit Cash (or Bank) or Bills
Receivable and credit the consignee’s personal account
3/7/2019 Bills Receivable A/c Dr. 30,000
To Wye 30,000
(Note: Wye’s account has appeared only now, in the previous two
entries his account did not figure since he is not personally
involved)

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6.54 PRINCIPLES AND PRACTICE OF ACCOUNTING

4 Wye’s acceptance will mature on 6/10/2019

Assuming it was met, the entry will be:
6/10/2019 Bank A/c Dr. 30,000
To Bills Receivable A/c 30,000
(Note: If such bill is discounted by consignor with the bank before
maturity, pass usual entry for discounting a bill. The discount on
bills may either be treated as consignment expenses and charged
to Consignment A/c or it may be treated as general financial
charges and charged to Profit & Loss Account)
5 On receipt of Account sale
31/12/2019 (a) For sales made by the consignee, debit his personal account
and credit Consignment Account
Wye Dr. 55,000
To Consignment to Wye A/c 55,000
(b) For expenses incurred by the consignee as well as bad debts
suffered by him on behalf of the consignor, debit
Consignment Account and credit Consignee Account
31/12/2019 Consignment to Wye A/c (2,000+500+300+600) Dr. 3,400
To Wye 3,400
(c) For commission due to the consignee, debit Consignment
Account and credit the consignee.
31/12/2019 Consignment to Wye A/c(10% on ` 55,000) 5,500
To Wye 5,500
(d) For the remittance that may accompany the Account Sales,
debit Bank and credit the consignee.
Bank A/c Dr. 16,100
To Wye 16,100
6 For the goods that may remain unsold debit the Consignment
Stock Account and credit Consignment Account.
31/12/2019 Inventories on Consignment A/c Dr. 10,600
To Consignment to Wye A/c 10,600
Note: (i) Cost of Inventories
1/5 of Cost to consignor ` 10,000
1/5 of expense incurred by the consignor ` 200
1/5 of freight (direct exp. Of consignee) ` 400
` 10,600

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55 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.55

(ii) Inventories on Consignment Account is an asset; it will be

shown in the balance sheet of the consignor and next year it
will be transferred to the debit of the Consignment Account.
7 At this stage the Consignment Account will reveal profit or loss
(see the account given below). The profit or loss will be transferred
to the Profit and Loss Account of the consignor by debit to the
Consignment Account.
31/12/2019 Consignment to Wye A/c Dr. 5,700
To Profit and Loss A/c 5,700
8 The Goods sent on Consignment Account should be closed by
transfer to the Trading Account debit the former and credit the
latter:
31/12/2019 Goods sent on Consignment Account Dr. 50,000
To Trading Account 50,000

Important Ledger Accounts

Consignment to Wye Account
2019 Particulars ` 2019 Particulars `
1-Jul To Goods sent on Dec. 31 By Wye-sale
Consignment A/c 50,000 Proceeds 55,000
1-Jul To Bank(expenses) 1,000 Dec. 31 By Inventories on
Dec. 31 To Wye-expenses Consignment 10,600
& bad debt 3,400 Account
Dec. 31 To Wye-commission 5,500
Dec. 31 To P&L Account-transfer of profit 5,700
65,600 65,600

Goods sent on consignment account

2019 Particulars ` 2019 Particulars `
Dec. 31 To Trading A/c 50,000 July 1 By Consignment to 50,000
Wye A/c

Inventories on Consignment account

2019 Particulars ` 2019 Particulars `
Dec. 31 To Consignment to Wye A/c 10,600 Dec. 31 By Balance c/d 10,600
2020
Jan. 1 To Balance b/d 10,600

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6.56 PRINCIPLES AND PRACTICE OF ACCOUNTING

Wye’s account
2019 ` 2019 `
Dec. 31 To Consignment 3-Jul By Bills Receivable
Wye A/c 55,000 Account 30,000
By Consignment to
Wye A/c –
Expenses & bad debt 3,400
Commission 5,500
By Bank
(balance received) 16,100
55,000 55,000

3.4 VALUATION OF INVENTORIES

The principle is that inventories should be valued at cost or net realizable value whichever is lower, the same
principle as is practised for preparing final accounts. In the case of consignment, cost means not only the cost of
the goods as such to the consignor but also all expenses incurred till the goods reach the premises of the
consignee. Such expenses include packaging, freight, cartage, insurance in transit, octroi, import duty etc. But
expenses incurred after the goods have reached the consignee’s godown (such as godown rent, insurance of
godown, delivery charges, salesman salaries) are not treated as part of the cost of purchase for valuing
inventories on hand. That is why in the case given above, inventories has been valued ignoring godown rent and
insurance.
Note: Sometimes an examination problem states only that the consignor’s expenses amounted to such amount
and that consignee spent so much. If details are not available, then for valuing inventories the expenses incurred
by the consignor should be treated as part of cost while those incurred by the consignee should be ignored.
If the expected selling price of inventories on hand is lower than the cost, the inventories should be valued at
expected net selling price only, i.e. expected selling price less delivery expenses, etc.

3.5 GOODS INVOICED ABOVE COST

Sometimes the proforma invoice is made out at a value higher than the cost and entries in the books of the
consignor are made out on that basis – even the inventories remaining unsold will initially be valued on the basis
of the invoice price. It must be remembered, however, that the profit or loss can be ascertained only if sale
proceeds (plus) inventories on hand, valued on cost basis, is compared with the cost of the goods concerned
together with expenses. Hence, if entries are first made on invoice basis, the effect of the loading (i.e., amount
added to arrive at the invoice price) must be removed by additional entries. Suppose in the example given above,
if the invoice is cost plus 20%, i.e., ` 60,000 for the goods sent to Wye. The entries will be initially:
Particulars ` `
(i) Consignment to Wye A/c Dr. 60,000

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57 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.57

To Goods sent on Consignment A/c 60,000

(ii) Consignment to Wye A/c Dr. 1,000
To Bank 1,000
(iii) Bills Receivable A/c Dr. 30,000
To Wye 30,000
(iv) Bank A/c Dr. 30,000
To Bills Receivable A/c 30,000
(v) Wye Dr. 55,000
To Consignment to Wye A/c 55,000
(vi) Consignment to Wye A/c Dr. 3,400
To Wye 3,400
(vii) Consignment to Wye A/c Dr. 5,500
To Wye 5,500
(viii) Bank A/c Dr. 16,100
To Wye 16,100
(ix) Inventories on Consignment A/c Dr. 12,600
To Consignment to Wye A/c 12,600
[1/5 of 60,000 + 1/5 of (1,000 + 2,000)]

[Students will see that except for difference in the amounts in entries (i) and (ix), these and other entries are the
same as those already given.]
Additional entries (before ascertaining profit) to remove the effect of loading:
(a) Goods sent on Consignment A/c Dr. 10,000
To Consignment to Wye A/c 10,000
[Entry (i) reversed to the extent of loading in order to debit the Consignment A/c on cost basis].
(b) Consignment to Wye A/c Dr. 2,000
To Inventory Reserve Account 2,000
(The amount of loading included in the value of the closing Inventories is unrealised profit – hence reserve is
created by debit to the Consignment Account).
The Consignment Account will now reveal a profit of ` 5,700 the same as before. It will be transferred to the P&L
A/c. Similarly entry given in 8 in the earlier illustration will be made to transfer the balance in the Goods sent on
Consignment Account in the earlier illustration ` 50,000) after entry in (a) above to the credit of Trading Account.
The accounts (except for Wye whose account will be the same as already shown) are given below:

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6.58 PRINCIPLES AND PRACTICE OF ACCOUNTING

Consignment to Wye Account

2019 Particulars ` 2019 Particulars `
1-Jul To Goods sent on Dec. 31 By Wye
Consignment A/c 60,000 Sales proceeds 55,000
To Bank A/c – expenses 1,000 By Inventories on Consignment A/c 12,600
Dec. 31 To Wye-expenses & bad debt 3,400 By Goods sent on Consignment 10,000
A/c(loading)
“ To Wye-commission 5,500
To Inventory Reserve A/c 2,000
“ To Profit and Loss A/c
transfer of profit 5,700
77,600 77,600

Goods sent on Consignment Account

2019 ` 2019 `
Dec. 31 To Consignment to Wye A/c – 10,000 1-Jul By Consignment to Wye A/c 60,000
loading
To Trading A/c –transfer (bal. fig.) 50,000
60,000 60,000

Inventories on Consignment Account

2019 ` 2019 `
Dec. 31 To Consignment to Wye A/c 12,600 Dec. 31 By Balance c/d 12,600

2020
Jan. 1 Balance b/d 12,600

Inventory Reserve Account

2019 ` 2019 `
Dec. 31 To Balance c/d 2,000 Dec. 31 By Consignment to Wye A/c 2,000
2019
Jan. 1, 2020 By Balance b/d 2,000

The last two accounts will be carried forward to the next year and their balance will then be transferred to the
Consignment Account – ` 12,600 on the debit side and ` 2,000 on the credit. This year in the balance sheet the
net amount of ` 10,600 will be shown on the assets side as shown below:

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59 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.59

`
Inventories on consignment 12,600
Less: Inventory Reserve 2,000
10,600

What would be the situation if the commission to Wye includes del-credere commission also?
In that case Wye would not be able to charge the bad debt of ` 600 to Exe; he will have to bear the loss himself.
The student can see that then the profit on consignment will be ` 6,300.
In this regard it is to be noted that when del – credere commission is paid to the consignee, the consignee account
is debited in the books of consignor for both cash and credit sales. But if no such del – credere commission is
paid then consignee account cannot be debited for credit sales and in that case the following entry is passed in
the books of consignor for credit sales.
Consignment Trade receivables A/c Dr.
To Consignment A/c
The difference is because in case del-credere commission is paid to consignee then consignee is responsible to
bear any loss of bad debts and he will have to pay full amount of sales to consigner. Accordingly, in the books of
consignor, whole amount (cash sales plus credit sales) is shown as receivable from consignee. On the other
hand if del-credere commission is not paid than consignor is responsible to bear loss of bad debts, therefore, till
the time consignee has not received money from customers, it is not shown as receivable from consignee.

3.6 NORMAL LOSS

If some loss is unavoidable, it would be spread over the entire consignment while valuing inventories. The total
cost plus expenses incurred should be divided by the quantity available after the normal loss to ascertain the
cost per unit. Suppose 10,000 kg of apples are consigned to a wholesaler, the cost being ` 30 per kg, plus
` 40,000 of freight. It is concluded that a loss of 15% is unavoidable. The cost per kg will be `3,40,000/8,500 or
` 40. If the unsold inventory is 1,000 kg its value will be ` 40,000.
Accordingly, no entry is recorded for normal loss and same is considered as expense which is considered for
valuation of remaining inventory.

3.7 ABNORMAL LOSS

If any accidental or unnecessary loss occurs, the proper thing to do is to find out the cost of the goods thus lost
and then to credit the Consignment Account and debit the Profit and Loss Account – this will enable the consignor
to know what profit would have been earned had the loss not taken place.
Suppose 1,000 sewing machines costing ` 2,500 each are sent on consignment basis and ` 10,000 are spent
on freight etc. 20 machines are damaged beyond repair. The amount of loss will be:
Cost = 20 × 2500 ` 50,000
Expenses = (20×10,000)/1000 ` 200
` 50,200

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6.60 PRINCIPLES AND PRACTICE OF ACCOUNTING

This amount should be credited to the Consignment Account and debited to the P&L A/c. If any amount, say,
` 40,000 is received from the insurance company, then debit to the P&L A/c will be only ` 10,200. But the credit
to the Consignment Account will still be ` 50,200. ` 40,000 will have been debited to the Bank Account.
Students shall note that abnormal loss is valued just like inventories in hand.
Students should be careful while valuing goods lost in transit and goods lost in consignee’s godown. Both are
abnormal loss but in case of former consignee’s non-recurring expenses are not to be included whereas it is to
be included in latter case.
Further, for the purpose of valuation of inventory in hand, it should be noted that while normal loss is considered
as part of cost of remaining goods, whereas abnormal loss is ignored. In the example given above assume that
10,000 Kg apples were sent in 10 different trucks and out of which one truck met an accident and 500Kg apples
were destroyed. In such case cost of remaining apples will be computed as below:
Qty. Amount (`)
Total apples shipped 10,000 3,40,000 (@ `34 per Kg including freight)
Apples lost in accident 500 17,000 (@ `34 per Kg including freight)
Remaining apples 9,500 3,23,000 (@ `34 per Kg including freight)
Normal loss (15%) 1,425 Nil
Remaining saleable apples 8,075 3,23,000 (@ `40 per Kg)

It is clear from above example that abnormal loss will not have impact on per unit cost, however, per unit cost
will change due to normal cost as the remaining quantity will absorb cost of normal loss whereas abnormal loss
will be immediately expensed off to profit or loss.
Distinctions between normal and abnormal loss

Normal loss Abnormal loss

Normal loss occurs due to inherent nature of the Abnormal loss occurs mainly because of unforeseen
goods being shipped e.g. leakage, evaporation, loss events e.g. accident or natural calamity etc.
of perishable goods etc.
Normal loss is not accounted for immediately and is Abnormal loss is accounted for immediately in profit
loaded on the remaining goods. It gets accounted for and loss account.
as cost of remaining goods as and when they are sold.
As normal loss is added to cost of remaining goods, it Abnormal loss does not impact gross profit.
impact gross profit.
Insurance companies generally do not cover normal Insurance is generally available for abnormal losses.
loss as it is expected to be incurred on each
consignment or storage of goods.
Normal loss is almost certain however it may vary Abnormal loss is because of unforeseen events and is
from time to time. not certain.

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61 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.61

Following entry is recorded for abnormal loss:

Abnormal Loss Account Dr.
To Consignment Account
If abnormal loss is recoverable from the insurance company
Insurance Company’s Account Dr.
To Abnormal Loss Account
If abnormal loss is recoverable from the consignee
Consignee’s Personal Account Dr.
To Abnormal Loss Account
If abnormal loss is not recoverable, Abnormal Loss Account is transferred to Profit & Loss Account.

3.8 COMMISSION
Commission is the remuneration paid by the consignor to the consignee for the services rendered to the former
for selling the consigned goods. Three types of commission can be provided by the consignor to the consignee,
as per the agreement, either simultaneously or in isolation. They are:

3.8.1 Ordinary Commission

The term commission simply denotes ordinary commission. It is based on fixed percentage of the gross sales
proceeds made by the consignee. It is given by the consignor regardless of whether the consignee is making
credit sales or not. This type of commission does not give any protection to the consignor from bad debts and is
provided on total sales.

3.8.2 Del-credere Commission

To increase the sale and to encourage the consignee to make credit sales, the consignor provides an
additional commission generally known as del-credere commission. This additional commission when provided
to the consignee gives a protection to the consignor against bad debts. In other words, after providing the del-
credere commission, bad debts is no more the loss of the consignor. It is calculated on total sales unless there
is any agreement between the consignor and the consignee to provide it on credit sales only.

3.8.3 Over-riding Commission

It is an extra commission allowed by the consignor to the consignee to promote sales at higher price then specified
or to encourage the consignee to put hard work in introducing new product in the market. Depending on the
agreement it is calculated on total sales or on the difference between actual sales and sales at invoice price or
any specified price. In order to encourage the consignee to earn higher margins, it can also be in the form of
share of additional profits made by consignee on sale of goods.

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6.62 PRINCIPLES AND PRACTICE OF ACCOUNTING

3.9 RETURN OF GOODS FROM THE CONSIGNEE

Consigned goods can be returned by the consignee because of many reasons like poor quality or not upto the
specimen or destroyed in transit etc. In such a situation, the question arises what is the valuation of returned
goods. Consigned goods returned by the consignee to the consignor are valued at the price at which it was
consigned to the consignee. Expenses incurred by the consignee to send those goods back to the consignor are
not taken into consideration while valuing it because the goods were already in a salable conditions and location
and changing the location back from consignee to consignor is not a cost which must have to be incurred to sell
the goods. This is generally called secondary freight in accounting terms.

3.10 ACCOUNT SALES

An account sale is the periodical summary statement sent by the consignee to the consignor. It contains details
regarding –
(a) sales made,
(b) expenses incurred on behalf of the consignor,
(c) commission earned,
(d) unsold inventories left with the consignee,
(e) advance payment or security deposited with the consignor and the extent to which it has been adjusted,
(f) balance payment due or remitted.
It is a summary statement and is different from Sales Account.

3.11 ACCOUNTING IN THE BOOKS OF THE CONSIGNEE

The consignee is not concerned when goods are consigned to him or when the consignor incurs expenses. He
is concerned only when he sends an advance to the consignor, makes a sale, incurs expenses on the
consignment and earns his commission. He debits or credits the consignor for all these as the case may be.
Following entries are recorded in the books of consignee:
1. On making sales
Cash/Bank Account/Debtors Dr.
To Consignor’s Personal Account
2. For expenses incurred and his commission
Consignor’s Personal Account Dr.
To Bank Account
3. For advance paid to consignor
Consignor’s Personal Account Dr.
To Bank Account

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63 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.63

4. For recording bad debts

Bad Debts Account Dr.
To Customer’s Account
5. For writing off bad debts
(a) When del-credere commission is not allowed
Consignor’s Personal Account Dr.
To Bad Debts Account
(b) When del-credere commission is allowed
Commission Account Dr.
To Bad Debts Account

ILLUSTRATION 2

Exe sent on 1st July, 2019 to Wye goods costing ` 50,000 and spent ` 1,000 on packing etc. On 3rd July, 2019,
Wye received the goods and sent his acceptance to Exe for ` 30,000 payable at 3 months. Wye spent ` 2,000
on freight and cartage, ` 500 on godown rent and ` 300 on insurance. On 31st December, 2019 he sent his
Account Sales (along with the amount due to Exe) showing that 4/5 of the goods had been sold for ` 55,000.
Wye is entitled to a commission of 10%. One of the customers turned insolvent and could not pay ` 600 due from
him. Show the necessary journal entries in the consignee’s book.

SOLUTION

Journal Entries in the books of Consignee

2019 Particulars ` `
1 On sending the acceptance to Exe
July 3 Exe Dr. 30,000
To Bills Payable A/c 30,000
2 On meeting expenses on the consignment:
July 3 Exe Dr. 2,800
To Bank 2,800
3 On meeting his acceptance:
Oct. 6 Bills payable Dr. 30,000
To Bank 30,000
4 On sales being effected:
Trade receivables/Bank Dr. 55,000
To Exe 55,000

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6.64 PRINCIPLES AND PRACTICE OF ACCOUNTING

5 On there being a bad debt:

Exe Dr. 600
To Trade receivables 600
6 On earning the commission:
Exe Dr. 5,500
To Commission Earned A/c 5,500
7 On settling the account to Exe:
Exe Dr. 16,100
To Bank 16,100

If the commission includes del-credere commission also, he would not be able to debit Exe for the bad debt. In
that case the debit should be to the Commission Earned Account whose net balance will then be `4,900 and he
will have to pay `16,700 to Exe.

ILLUSTRATION 3

1,000 toys consigned by Rosie & Co. of Calcutta to Sahoo of Srinagar at a cost of `150 each. Rosie & Co. paid
freight ` 10,000 and insurance ` 1,500. During the voyage 100 toys were totally damaged by fire and had to be
thrown overboard. Sahoo took delivery of the remaining toys and paid `14,400 as customs duty. Sahoo sent a
bank draft to Rosie & Co. for `50,000 as advance payment and later sent an account sales showing that 800
toys had been sold at `220 each. Expenses incurred by Sahoo on godown rent and advertisement, etc.,
amounted to `2,000. Sahoo was entitled to commission of 5 per cent. One of the credit customers could not pay
for 5 toys.
You are required to prepare the Consignment Account, Goods sent on consignment, Inventories on consignment
account and Sahoo’s a/c in the books of Rosie & Co., assuming that nothing has been recovered from the insurers
due to a defect in the policy. Sahoo settled his account immediately.

SOLUTION

In the books of M/s Rosie & Co

Dr. Consignment to Sahoo Account Cr
Particulars ` Particulars `
To Goods sent on Consignment A/c 1,50,000 By Sahoo- sale Proceeds 1,76,000
To Bank(expenses) 11,500 By Abnormal loss Ac (loss by fire) 16,150
Freight 10,000
Insurance 1,500
To Sahoo-expenses 26,300 By Inventories on consignment 17,750
Customs duty 14,400
Sundry expenses 2,000
Commission (5%) 8,800
Bad debt (220*5) 1,100
To P&L Account-transfer of profit 22,100
2,09,900 2,09,900

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65 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.65

Dr. Goods sent on consignment account Cr

Particulars ` Particulars `
To Trading A/c 1,50,000 By Consignment to Sahoo A/c 1,50,000
1,50,000 1,50,000
Dr. Inventories on Consignment account Cr
Particulars ` Particulars `
To Consignment to Wye A/c 17,750 By Balance c/d 17,750
17,750 17,750
Dr. Sahoo’s account Cr
Particulars ` Particulars `
To Consignment to Sahoo A/c 1,76,000 By bank (bank draft as advance) 50,000
By consignment to Sahoo A/c
Customs duty 14,400
Sundry expenses 2,000
Commission 8,800
Bad debts 1,100 26,300
By balance amount remitted 99,700
1,76,000 1,76,000

Working notes :
(a) Computation of the abnormal loss- 100 toys
a. Cost of 100 toys 100 x 150 15000
b. Freight charges- 100 toys 10000/1000 x 100 1000
c. Insurance- 100 toys 1500/1000 x 100 150
a. Abnormal loss 16,150
(b) Computation of the Closing stock- (1000-100-800)
a. Cost of 100 toys 100 x 150 15000
b. Freight charges- 100 toys 10000/1000 x 100 1000
c. Insurance- 100 toys 1500/1000 x 100 150
d. Customs duty-100 toys 14400/900 x 100 1600
Closing stock 17,750

ILLUSTRATION 4

Nike sports Co. of New Delhi consigned 100 shoes to Adidas Co. of Ahmedabad costing ` 1,500 each, invoiced
at ` 2,000 each. The consignor paid freight ` 10,000 and insurance in transit ` 1,500. During transit, 10 shoes
were totally damaged.

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6.66 PRINCIPLES AND PRACTICE OF ACCOUNTING

Adidas Co took delivery of remaining shoes and paid ` 1,530 for octroi duty. Adidas co. sent a bank draft to Nike
sports Co. for ` 50,000 as advance and later on sent an account sales showing that 80 shoes had been sold @
` 2,200 each. Expenses incurred by Adidas Co. on godown rent were ` 2,000. Adidas Co. is entitled to a
commission of 5% on invoice price and 25% on any surplus of sale price over invoice price.
Prepare consignment account, consignee’s account and the related working notes account in the books of the
Nike sports Co.

SOLUTION

In the books of M/s Nike sports Co.

Dr. Consignment to Adidas Co. Account Cr
Particulars ` Particulars `
To Goods sent on Consignment A/c 2,00,000 By goods sent on consignment 50,000
To Bank (expenses) 11,500 By Adidas Co- sale Proceeds 1,76,000
Freight 10,000
Insurance 1,500
To Adidas Co.-expenses 15,530 By Abnormal loss Ac (loss in transit) 16,150
Octroi duty 1,530
Go-down rent 2,000
Commission (WN) 12,000
To Reserve on closing stock 5,000 By Inventories on consignment 21,320
To P&L Account-transfer of profit 31,440
2,63,470 2,63,470
Dr. Adidas Co. account Cr
Particulars ` Particulars `
To Consignment to Adidas A/c 1,76,000 By bank (bank draft as advance) 50,000
By consignment to Adidas A/c
Octroi duty 1,530
Go-down rent 2,000 15,530
Commission (WN) 12,000
By balance amount remitted 1,10,470
1,76,000 1,76,000
Working notes :
(a) Computation of the abnormal loss- 10 shoes
a. Cost of 100 shoes 10 x 1500 15000
b. Freight charges- 100 shoes 10000/100 x 10 1000
c. Insurance- 100 shoes 1500/100 x 10 150
Abnormal loss 16,150

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67 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.67

(b) Computation of the Closing stock- (100-10-80)

a. Invoice price of 10 shoes 10 x 2000 20,000
b. Freight charges- 10 shoes 10000/100 x 10 1000
c. Insurance- 10 shoes 1500/100 x 10 150
d. Octroi duty-10 shoes 1530/90 x 10 170
Closing stock 21,320
(c) Stock reserve on the goods sent on consignment= 100 shoes x 500 (2000-1500) = 50,000
(d) Stock reserve on the closing stock of consigned goods= 10 shoes x 500 (2000-1500) = 5000
(e) Computation of over-riding commission payable to Adidas Co.
Sales at invoice price= 80 x 2000 = 1,60,000
Commission at 5% on the above= 5% x 1,60,000 = 8000
Surplus over the invoice price= 2200-2000 = ` 200
Commission of 25% over the surplus= 200 x 80 = 16000 x 25% = 4000
Total commission = Normal + surplus commission = 8000+4000 = 12,000

3.12 ADVANCE BY THE CONSIGNEE VS SECURITY AGAINST THE

CONSIGNMENT
Generally the consignor insist the consignee for some advance payment for the goods consigned at the time of
delivery of goods. This advance payment is adjusted in full against the amount due by the consignee on account
of the goods sold.
But if the advance money deposited by the consignee is in the form of security against the goods consigned then
the full amount is not adjusted against the amount due by the consignee to the consignor on account of goods
sold if, there is any unsold inventory left with the consignee. In that case proportionate security in respect of
unsold goods is carried forward till the time the respective goods held with the consignee are sold.

ILLUSTRATION 5

Miss Rakhi consigned 1,000 radio sets costing `900 each to Miss Geeta, her agent on 1st July, 2020. Miss Rakhi
incurred the following expenditure on sending the consignment.
Freight ` 7,650
Insurance ` 3,250
Miss Geeta received the delivery of 950 radio sets. An account sale dated 30th November, 2020 showed that
750 sets were sold for `9,00,000 and Miss Geeta incurred `10,500 for carriage.
Miss Geeta was entitled to commission 6% on the sales effected by her. She incurred expenses amounting to
`2,500 for repairing the damaged radio sets remaining in the inventories.
Miss Rakhi lodged a claim with the insurance company which was admitted at `35,000. Show the Consignment
Account and Miss Geeta’s Account in the books of Miss Rakhi.

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6.68 PRINCIPLES AND PRACTICE OF ACCOUNTING

SOLUTION

In the books of Miss Rakhi

Consignment Account
Particulars ` Particulars `
To Goods sent on By Miss Geeta 9,00,000
Consignment A/c 9,00,000 By Insurance Co. 35,000
By Profit & Loss A/c
To Cash abnormal loss(net) 10,545
Freight 7,650 By Consignment
Insurance 3,250 10,900 Inventories 1,84,391
To Miss Geeta
Carriage 10,500
Repairs 2,500
Commission 54,000 67,000
To Profit & Loss A/c 1,52,036
11,29,936 11,29,936

Miss Geeta’s Account

Particulars ` Particulars ` `
To Consignment A/c 9,00,000 By Consignment A/c
(Sales) Expenses:
Carriage 10,500
Repairs 2,500
Commission 54,000 67,000
By Bank(bal. fig.) 8,33,000
9,00,000 9,00,000
Note: It is assumed that the agent has remitted the amount due from her.
Working Notes:
1. Abnormal loss :
Cost to the consignor: 50 sets @ ` 900 45,000
50 × 10,900 545
Add: Proportionate expenses incurred by the consignor
1,000
Gross abnormal loss 45,545
Less: Insurance claim (35,000)
Net abnormal loss 10,545
2. Valuation of Inventories
200 sets @ ` 900 1,80,000

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69 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.69

Add: Proportionate expenses of the consignor 2,180

Add: Carriage paid by the consignee 2,211
1,84,391

ILLUSTRATION 6

Vikram Milk Foods Co. Ltd. of Vikrampur sent to Sunder Stores, Sonepuri 5,000 kgs of baby food packed in 2,000
tins of net weight 1 kg and 6,000 packets of net weight 1/2 kg for sale on consignment basis. The consignee’s
commission was fixed at 5% of sale proceeds. The cost price and selling price of the product were as under:
1 kg. tin 1/2 kg. packet
` `
Cost Price 10 6
Selling Price 15 7
The consignment was booked on freight “To Pay” basis, and freight charges came to 2% of selling value. One
case containing 50 (1kg. tins) was lost in transit and the transport carrier admitted a claim of `450.
At the end of the first half-year, the following information is gathered from the “Account Sales” sent by the
consignee:
(i) Sale proceeds: 1,500 1 kg. tins
4,000 1/2 kg. packets
(ii) Store rent and insurance charges ` 600.
Find out the value of closing inventory on consignment.
Show the Consignment A/c and the Consignee’s A/c in the books of Vikram Milk Food Co. Ltd. assuming that the
consignee had paid the amount due from him.

SOLUTION

Vikram Milk Foods Co. Ltd.

Consignment to Sonepuri Account
Particulars ` Particulars `
To Goods sent on By Sunder Stores
Consignment A/c
2,000 1 kg. tins @ ` 10 20,000 1,500 1 kg. tins @ ` 15 22,500
6,000 1/2 kg. pkts. @ ` 6 36,000 56,000 4,000 1/2 kg. pkts. @ ` 7 28,000 50,500
To Sunder Stores: By Insurance - Claim 450
Freight 1,440 By Profit & Loss A/c -
Rent and insurance 600 abnormal loss(Net) 65
Commission 2,525 4,565 By Inventory on 16,915
consignment A/c

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6.70 PRINCIPLES AND PRACTICE OF ACCOUNTING

To Profit & Loss A/c – 7,365

Profit
67,930 67,930
Sunder Stores, Sonepuri
Particulars ` Particulars `
To Consignment to Sonepuri By Consignment to
Account - Sales Proceeds 50,500 Sonepuri Account -
Freight 1,440
Rent & Insurance 600
Commission 2,525
By Bank(Bal. fig) 45,935
50,500 50,500
Working Notes:
(i) Sale value of total consignment:
2,000 1 kg. tins @ ` 15 30,000
6,000 1/2 kg. pkts. @ ` 7 42,000
72,000
(ii) Freight @ 2% of above 1,440
(iii) Inventories at the end:
450 1 kg. tins @ ` 10 (Selling Price ` 6,750) 4,500
2,000 1/2 kg. pkts. @ ` 6 (Selling Price ` 14,000) 12,000
16,500
Add: Freight 2% of (Selling Price ` 20,750) 415
16,915
(iv) Loss in transit:
Cost of 50 1 kg. tins @ ` 10 500
Freight @ 2% of Selling Price ` 750 15
Gross abnormal Loss 515
Less : Claim (450)
Net abnormal Loss 65

ILLUSTRATION 7

Shri Mehta of Mumbai consigns 1,000 cases of goods costing ` 1,000 each to Shri Sundaram of Chennai. Shri
Mehta pays the following expenses in connection with consignment:
`
Carriage 10,000

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71 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.71

Freight 30,000
Loading charges 10,000
Shri Sundaram sells 700 cases at ` 1,400 per case and incurs the following expenses:
Clearing charges 8,500
Warehousing and storage 17,000
Packing and selling expenses 6,000

It is found that 50 cases have been lost in transit and 100 cases are still in transit.
Shri Sundaram is entitled to a commission of 10% on gross sales. Draw up the Consignment Account and
Sundaram’s Account in the books of Shri Mehta.

SOLUTION

In the books of Shri Mehta

Consignment to Sundaram of Chennai Account
Particulars ` Particulars `
To Goods sent on By Sundaram (Sales) 9,80,000
Consignment 10,00,000 By Loss in Transit 50 cases 52,500
@ `1,050 each
To Bank (Expenses) 50,000 By Consignment Inventories
To Sundaram (Expenses) 31,500 In hand 150 @ ` 1,060 each 1,59,000
To Sundaram (Commission) 98,000 In transit 100 @ ` 1,050 each 1,05,000 2,64,000
To Profit on Consignment to 1,17,000
Profit & Loss A/c
12,96,500 12,96,500

Sundaram’s Account
Particulars ` Particulars `
To Consignment to Chennai A/c 9,80,000 By Consignment A/c (Expenses) 31,500
By Consignment A/c (Commission) 98,000
By Balance c/d 8,50,500
9,80,000 9,80,000

Working Notes:
(i) Consignor’s expenses on 1,000 cases amounts to `50,000; it comes to `50 per case. The cost of cases
lost will be computed at `1,050 per case.
(ii) Sundaram has incurred ` 8,500 on clearing 850 cases, i.e., `10 per case; while valuing closing
inventories with the agent `10 per case has been added to cases in hand with the agent.

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6.72 PRINCIPLES AND PRACTICE OF ACCOUNTING

(iii) It has been assumed that balance of `8,50,500 is not yet paid.

ILLUSTRATION 8

Ajay of Mumbai consigned to Vijay of Delhi, goods to be sold at invoice price which represents 125% of cost.
Vijay is entitled to a commission of 10% on sales at invoice price and 25% of any excess realised over invoice
price. The expenses on freight and insurance incurred by Ajay were `10,000. The account sales received by Ajay
shows that Vijay has effected sales amounting to `1,00,000 in respect of 75% of the consignment. His selling
expenses to be reimbursed were ` 8,000. 10% of consignment goods of the value of `12,500 were destroyed in
fire at the Delhi godown. Vijay remitted the balance in favour of Ajay. Prepare consignment account and the
account of Vijay in the books of Ajay along with the necessary calculations.

SOLUTION

Books of Ajay
Consignment to Vijay Account
Particulars ` Particulars `
To Goods sent on Consignment A/c 1,25,000 By Goods sent on Consignment A/c (Loading) 25,000
To Cash A/c 10,000 By Abnormal Loss 11,000
To Vijay (Expenses) 8,000 By Vijay (Sales) 1,00,000
To Vijay (Commission) 10,938 By Inventories on Consignment A/c 20,250
To Inventories Reserve A/c 3,750 By General Profit & Loss A/c 1,438
1,57,688 1,57,688

Vijay’s Account
Particulars ` Particulars `
To Consignment A/c 1,00,000 By Consignment A/c 8,000
By Consignment A/c 10,938
By Bank A/c 81,062
1,00,000 1,00,000

Working Notes:
1. Calculation of value of goods sent on consignment:
Abnormal Loss at Invoice price ` 12,500.
Abnormal Loss as a percentage of total consignment = 10%.
Hence the value of goods sent on consignment = ` 12,500 X 100/ 10 = ` 1,25,000.
Loading of goods sent on consignment = ` 1,25,000 X 25/125 = ` 25,000.
2. Calculation of abnormal loss (10%):
Abnormal Loss at Invoice price ` 12,500
Abnormal Loss at cost = ` 12,500 X 100/125 = ` 10,000

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73 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.73

Proportionate expenses of Ajay (10 % of `10,000) = ` 1,000

= ` 11,000
3. Calculation of closing Inventories (15%):
Ajay’s Basic Invoice price of consignment = ` 1,25,000
Ajay’s expenses on consignment = ` 10,000
` 1,35,000
Value of closing Inventories = 15% of ` 1,35,000 = ` 20,250
Loading in closing Inventories = `25,000 X 15/100 = ` 3,750
Where `18,750 (15% of `1,25,000) is the basic invoice price of the goods sent on consignment
remaining unsold.
4. Calculation of commission:
Invoice price of the goods sold = 75% of ` 1,25,000 = ` 93,750
Excess of selling price over invoice price = ` 6,250 (` 1,00,000- ` 93,750)
Total commission = 10% of ` 93,750 + 25% of ` 6,250
= ` 9,375 + ` 1,562.50
= ` 10,937.50 OR 10,938
Note:
1. It has been assumed that final payment received from Vijay.
2. Abnormal loss is always calculated at cost even if invoice price of goods is given.
3. Value of inventories always valued at invoice price if invoice price is given.

SUMMARY
 In Consignment one person (consignor) sends goods to another person (consignee) to be sold on behalf
of and at the risk of the former.
 In the case of consignment, cost means not only the cost of the goods as such to the consignor but also
all expenses incurred till the goods reaches the premises of the consignee. Such expenses include
packaging, freight, cartage, insurance in transit, octroi, etc.
 Expenses incurred after the goods have reached the consignee’s godown (such as godown rent,
insurance of godown, delivery charges) are not treated as part of the cost of purchase for valuing
inventories on hand.
 If the expected selling price of inventories on hand is lower than the cost, the value put on the inventories
should be expected net selling price only, i.e. expected selling price less delivery expenses, etc. i.e.
expenses necessary for sales.
 Proforma invoice is made to show the high value of goods consigned than the cost and entries in the
books of the consignor are made out on that basis. Even the inventories remaining unsold will initially
be valued on the basis of the invoice price.

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6.74 PRINCIPLES AND PRACTICE OF ACCOUNTING

 Hence, if entries are first made on invoice basis, the effect of the loading (i.e., amount added to arrive
at the invoice price) must be removed by additional entries to ascertain profit or loss.
 Abnormal loss is valued just like inventories in hand. Students should be careful while valuing goods lost
in transit and goods lost in consignee’s godown. Both are abnormal loss but in case of former consignee’s
non-recurring expenses are not to be included whereas it is to be included in case of latter.
 Normal loss, is an unavoidable loss and be spread over the entire consignment while valuing inventories.
The total cost plus expenses incurred should be divided by the quantity available after the normal loss
to ascertain the cost per unit.
 Commission is the remuneration paid by the consignor to the consignee for the services rendered to the
former for selling the consigned goods. Three types of commission can be provided by the consignor to
the consignee, as per the agreement, either simultaneously or in isolation. They are:
 Ordinary commission
 Del-credere commission
 Over-riding commission
 For accounting of consignee, he is concerned only when he sends an advance to the consignor, makes
a sale, incurs expenses on the consignment and earns his commission. He debits or credits the
consignor for all these as the case may be.
 Abnormal loss is always calculated at cost even if invoice price of goods is given.
 Value of inventories always valued at invoice price if invoice price is given.

TEST YOUR KNOWLEDGE

True and False
1. Value of the abnormal loss is debited to the consignment account
2. Sales account and account sales are one and the same.
3. Consignor is the owner of consignment stock.
4. Normal commission is paid to the consignee to bear the risk of the bad debts on sale of the consigned
stock.
5. There is no entry passed by the consignee in his books for the remaining stock of goods lying with him.
6. Consignment account is a representative personal account.
7. Proforma invoice is sent by the consignee to the consignor giving details about the stock of goods sent
on consignment and their cost, invoice price, etc.
8. The bad debts in case of del credere commission shall be debited to the Consignment account
9. Abnormal loss is created out of uncontrollable situations and circumstances.
10. The relationship between the consignor and his consignee is that of a seller and a buyer.

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75 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.75

Multiple Choice Questions

1. P of Delhi sends out 1,000 boxes of toothpaste costing ` 200 each. Each box consist of 12 packets. 600
boxes were sold by consignee at ` 20 per packet. Amount of sale value will be:
(a) `1,44,000 (b) ` 1,20,000 (c) `1,32,000
2. X of Kolkata sends out 2,000 boxes to Y of Delhi costing ` 100 each. Consignor’s expenses ` 5,000.
1/10th of the boxes were lost in consignee’s godown and treated as normal loss. 1,200 boxes were sold
by consignee. The value of consignment Inventories will be:
(a) ` 68,333 (b) ` 61,500 (c) ` 60,000
3. Which of the following statement is not true:
(a) If del-credere commission is allowed, bad debt will not be recorded in the books of consignor
(b) If del-credere commission is allowed, bad debt will be debited in consignment account
(c) Del-credere commission is provided by consignor to consignee
4. X of Kolkata sent out 2,000 boxes costing 100 each with the instruction that sales are to be made at cost
+ 45%. X draws a bill on Y for an amount equivalent to 60% of sales value. The amount of bill will be:
(a) ` 1,74,000 (b) ` 2,00,000 (c) ` 2,90,000
5. Which of the following statement is wrong:
(a) Consignor is the owner of the consignment Inventories
(b) Del-credere commission is allowed by consignor to protect himself from bad debt
(c) All proportionate consignee’s expenses will be added up for valuation of consignment
Inventories.
6. Out of the following at which point the treatment of “Sales” and “Consignment” is same:
(a) Ownership transfer. (b) Money receive. (c) Inventories outflow.
7. If del-credere commission is allowed for bad debt, consignee will debit the bad debt amount to:
(a) Commission Earned A/c
(b) Consignor’s A/c
(c) Trade receivables (Customers) A/c
8. A proforma invoice is sent by:
(a) Consignee to Consignor (b) Consignor to Consignee
(c) Customer/Debtors to Consignee
9. Which of the following statement is correct:
(a) Consignee will pass a journal entry in his books at the time of receiving goods from consignor.
(b) Consignee will not pass any journal entry in his books at the time of receiving goods from
consignor.

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6.76 PRINCIPLES AND PRACTICE OF ACCOUNTING

(c) The ownership of goods will be transferred to consignee at the time of receiving the goods.
10. Consignment Inventories will be recorded in the balance sheet of consignor on asset side at:
(a) Invoice Value
(b) At Invoice value less Inventories reserve
(c) At lower than cost price
11. Which of the following expenses of consignee will be considered as non-selling expenses:
(a) Advertisement
(b) Insurance on freight inward
(c) Selling Expenses
12. The consignment accounting is made on the following basis:
(a) Accrual
(b) Realisation
(c) Cash Basis
13. Which of the following item is not credited to consignment account?
(a) Cash sales made by consignee
(b) Credit sales made by consignee
(c) Inventories Reserve on closing consignment Inventories

Theory Questions
1. Write short notes on:
(i) Del-credere commission.
(ii) Account sales.
(iii) Over-riding commission.
2. Distinguish between:
(i) Consignment sale and Normal sale.
(ii) Commission and Discount.

Practical Questions
1. X of Delhi purchased 10,000 metres of cloth for ` 2,00,000 of which 5,000 metres were sent on
consignment to Y of Agra at the selling price of ` 30 per metre. X paid ` 5,000 for freight and ` 500 for
packing etc.
Y sold 4,000 metre at ` 40 per metre and incurred ` 2,000 for selling expenses. Y is entitled to a
commission of 5% on total sales proceeds plus a further 20% on any surplus price realised over ` 30

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77 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.77

per metre. 3,000 metres were sold at Delhi at ` 30 per metre less ` 3,000 for expenses and commission.
Owing to fall in market price, the inventories of cloth in hand is to be reduced by 10%.
Prepare the Consignment Account and Trading and Profit & Loss Account in books of X.
2. D of Delhi appointed A of Agra as its selling agent on the following terms:
Goods to be sold at invoice price or over.
A to be entitled to a commission of 7.5% on the invoice price and 20% of any surplus price realized over
invoice price
The principals to draw on the agent a 30 days bill for 80% of the invoice price.
On 1st February, 2020, 1,000 cycles were consigned to A, each cycle costing ` 640 including freight
and invoiced at ` 800.
Before 31st March, 2020, (when the principal’s books are closed) A met his acceptance on the due date;
sold off 820 cycles at an average price of ` 930 per cycle, the sale expenses being ` 12,500; and
remitted the amount due by means of Bank draft.
Twenty of the unsold cycles were shop-spoiled and were to be valued at a depreciation of 50% of cost.
Show by means of ledger accounts how these transactions would be recorded in the books of A and find
out the value of closing inventory with A to be recorded in the books of D at cost.
3. Mr. Y consigned 800 packets of toothpaste, each packet containing 100 toothpastes. Cost price of each
packet was ` 900. Mr. Y Spent ` 100 per packet as cartage, freight, insurance and forwarding charges.
One packet was lost on the way and Mr. Y lodged claim with the insurance company and could get
` 570 as claim on average basis. Consignee took delivery of the rest of the packets and spent ` 39,950
as other non-recurring expenses and ` 22,500 as recurring expenses. He sold 740 packets at the rate
of ` 12 per toothpaste. He was entitled to 2% commission on sales plus 1% del-credere commission.
You are required to prepare Consignment Account. Calculate the cost of inventories at the end, abnormal
loss and profit or loss on consignment.
4. A of Agra sent on consignment goods valued ` 1,00,000 to B of Mumbai on 1st March, 2019. He incurred
the expenditure of ` 12,000 on freight and insurance. A’s accounting year closes on 31st December. B
was entitled to a commission of 5% on gross sales plus a del-credere commission of 3%. B took delivery
of the consignment by incurring expenses of ` 3,000 for goods consigned.
On 31.12.2019, B informed on phone that he had sold all the goods for ` 1,50,000 by incurring selling
expenses of ` 2,000. He further informed that only ` 1,48,000 had been realized and rest was considered
irrecoverable, and would be sending the cheque in a day or so for the amount due along with the
accounts sale.
On 5.1.2020, A received the cheque for the amount due from B and incurred bank charges of ` 260 for
collecting the cheque. The amount was credited by the bank on 9.1.2020.
Write up the consignment account finding out the profit/loss on the consignment, B’s account, Provision
for expenses account and Bank account in the books of the consignor, recording the transactions upto
the receipt and collection of the cheque.

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6.78 PRINCIPLES AND PRACTICE OF ACCOUNTING

ANSWERS/HINTS
True and False
1. False: The abnormal loss is credited to the consignment account since it is a reduction in the value of
the stock.
2. False: The sales account shows the balance receivable on account of the sales- both cash and credit.
Whereas the account sales statement is given by the consignee to the consignor on a periodical basis
detailing the transactions done by the former.
3. True: The consignor is the owner of the goods sent on consignment. Consignee is a mere agent
appointed to sell the goods for a commission and the mere transfer of possession does not entitle
consignee to become the owner of the goods.
4. False: The del-credere commission is the commission paid to the consignee for bearing the loss of the
bad debts if any.
5. True: It is the consignor who has to record the closing stock of the consigned goods since he is the
owner of the goods. There is no entry passed in the books of the consignee.
6. False: It is a nominal account recording the expenses on the debit and the income on the credit side,
balance being the profit/ loss on the consignment account to the trading account.
7. False: Proforma invoice is given by the consignor to the consignee with regard to the goods sent on
consignment and their price.
8. False: If del credere commission is given to the consignee then, the bad debts are taken into the
accounts of the consignee. It will not appear in the consignment account.
9. False: Abnormal loss occurs due to unforeseen circumstances, but if necessary steps are taken they
can be controlled, it is only the natural loss which cannot be controlled since it occurs due to nature of
the product.
10. False: The relationship between the consignor and the consignee is that of a principal and agent. It is
mere arrangement for sale of goods on behalf of the consignor.

Multiple Choice Questions

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.
(a) (a) (b) (a) (c) (c) (a) (b) (b) (b) (b) (a) (c)

Theoretical Questions
1. (i) Del-credere commission is an additional commission paid by the consignor to the consignee for
undertaking responsibility of collection of debts. Generally, the consignee gets ordinary
commission for sales made by him as a percentage of gross sales, over and above, he may get
del-credere commission for the additional responsibility of debt collection. Sometimes it is
agreed that del-credere commission shall be allowed on credit sales only. However, in the
absence of any such agreement the consignor allows del-credere commission on total sales

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79 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.79

and not merely on credit sales. If the consignee is entitled to del-credere commission, he has
to bear the bad debts; if any, arising, out of credit sale of consignment goods.
(ii) Account sales is a periodic statement furnished by the consignee to the consignor stating
therein, the quantity sold, price charged, expenses incurred on behalf of the consignee and
commission payable to him in respect of a particular consignment, and the net amount due from
him and remittance received if any. It also shows the details of quantity of goods received,
destroyed, if any, and still held as stock.
(iii) Over-riding commission is an extra commission allowed to the consignee in addition to the
normal commission. Such additional commission is generally allowed:-
To provide additional incentive to the consignee for the purpose of introducing and creating a
market for a new product.
To provide incentive for supervising the performance of other agents in a particular area.
To provide incentive for ensuring that the goods are sold by the consignee at the highest
possible price.
2. (i) In case of consignment, the property in the goods remains with the consignor until the goods
are actually sold. The consignee acts only as a custodian of goods sent by consignor. In
consignment, the ownership of goods does not pass on to the consignee in any case. In case
of ordinary sale, the ownership of goods passes to the buyer immediately after sale. In case of
consignment, the risk attached to the goods remain with the consignor even after sending the
goods to the consignee. However, in case of ordinary sale, as soon as the property in the goods
passes on to the buyers, the risk attached to the goods also passes at the same time. The
relationship between consignor and consignee is that of principal and agent. In case of credit
sale, the relationship between the buyer and the seller is that of a debtor and a creditor.
(ii) Commission may be defined as remuneration of an employee or agent relating to services
performed in connection with sales, purchases, collections or other types of business
transactions and is usually based on a percentage of the amounts involved.
Commission earned is accounted for as an income in the books of accounts, and commission
allowed or paid is accounted for as an expense in the books of the party availing such facility
or service.
The term discount refers to any reduction or rebate allowed and is used to express one of the
following situations:
An allowance given for the settlement of a debt before it is due i.e. cash discount.
An allowance given to the whole sellers or bulk buyers on the list price or retail price, known as
trade discount. A trade discount is not shown in the books of account separately and it is shown
by way of deduction from cost of purchases.

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6.80 PRINCIPLES AND PRACTICE OF ACCOUNTING

Practical Questions
Answer 1
In the books of Mr. X
Consignment Account
Particulars Amount ` Particulars Amount `
To Goods sent on
Consignment Account 1,50,000 By Y’s account: (Sales) 1,60,000
To Bank account: Freight and 5,500 By Goods sent on consignment 50,000
packing etc. (Cancellation of loading)
To Y’s account: By Inventories on consignment (W.N.2) 28,990
Selling expenses 2,000
Commission (W.N.1) 16,000
To Inventories Reserve (W.N.3) 10,000
To Profit and loss account (profit 55,490
on consignment transferred)
2,38,990 2,38,990

Trading and Profit and Loss Account

for the year ended……..
Particulars Amount ` Particulars Amount `
To Purchases 2,00,000 By Sales 90,000
To Gross profit c/d 26,000 By Goods sent on consignment 1,00,000
By Inventories in hand Cost ` 40,000
Less: 10% 4,000 36,000
2,26,000 2,26,000
To Expenses and commission 3,000 By Gross profit b/d 26,000
To Net profit 78,490 By Consignment A/c
(profit on consignment) 55,490
81,490 81,490

Working Notes:
i. Calculation of commission payable to Y: `
Total sale proceeds of Y 1,60,000
Surplus proceeds realised over ` 30 per metre
[4,000 x ` (40-30)] 40,000

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81 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.81

Commission:
5% of total sale proceeds (5% of ` 1,60,000) 8,000
20% of surplus (20% of ` 40,000) 8,000
16,000
ii. Inventories on Consignment: `
Cost of consignment Inventories (1000 mtrs@ ` 30) 30,000
Add: Expenses of consignor (5,500X1/5) 1,100
31,100
Less: Reduction of 10% in cost due to fall in market price (20,000+1,100) x 10% 2,110
28,990
iii. Loading (`10 x 1,000 mtrs) 10,000
Answer 2

D’s Account
2020 ` 2020 `
Feb. 1 To Bills payable A/c 6,40,000 Mar. 31 By Cash/Bank A/c (820x `930) 7,62,600
(80% of ` 8,00,000)
Mar. 31 To Cash A/c (expenses) 12,500
To Commission earned A/c 70,520
To Bank A/c 39,580
7,62,600 7,62,600

Bills Payable Account

2020 ` 2020 `
Mar. 4 To Cash/Bank A/c 6,40,000 Feb. 1 By D’s A/c 6,40,000
6,40,000 6,40,000

Value of closing inventory with A

`
160 cycles at ` 640 (cost price including freight) 1,02,400
20 cycles (shop-spoiled) at 50% of the cost i.e. at ` 320 each 6,400
Value of closing inventory with A i.e. the amount (net effect of the loading) at which D will
account for in his books on 31st March, 2020
1,08,800

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6.82 PRINCIPLES AND PRACTICE OF ACCOUNTING

Working Note:
1. Calculation of commission:
`
7.5 % on the invoice price amount (820x ` 800) i.e. ` 6,56,000 49,200
20% on the surplus price amount (820 x ` 130) ` 1,06,600 21,320
70,520
2.
`
Abnormal loss:
Cost of packet lost during transit 900
Add: Expenses incurred by Y 100
Gross Abnormal loss 1,000
Less: Insurance claim received (570)
Net Abnormal loss 430

3. Cost of inventories at the end:

`
59 packets @ ` 900 53,100
Add: Expenses incurred by Y (59x `100) 5,900
Add: Proportionate (non-recurring) expenses incurred by the consignee
(59/799x `39,950) 2,950
61,950
4.
Closing inventories No. of packets
Packets consigned 800
Less: Packet lost in transit (1)
799
Less: Packets sold 740
59

Answer 3
Consignment Account
` `
To Goods sent on consignment A/c 7,20,000 By Consignee’s A/c-Sales 8,88,000
(800 x ` 900) (740 x100x ` 12)
To Cash A/c 80,000

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83 ACCOUNTING FOR SPECIAL TRANSACTIONS 6.83

(expenses 800 x `100) By Abnormal Loss Cash A/c 570

(insurance claim)
To Consignee’s A/c: By Profit and loss account 430
Recurring expenses 22,500 (abnormal loss)
Non-recurring expenses 39,950 By Consignment stock A/c 61,950
Commission @ 2% on ` 8,88,000 17,760
Del-credere commission @ 1% on 8,880
` 8,88,000
To Profit and loss A/c 61,860
(profit on consignment)
9,50,950 9,50,950

Answer 4
In the books of Mr. A
Consignment to Mumbai Account
2019 ` 2019 `
March 1 To Goods sent on consignment A/c 1,00,000 Dec. 31 By B’s A/cs 1,50,000
To Cash A/c (freight and insurance) 12,000
To B’s A/c:
Clearance expenses 3,000
Selling expenses 2,000
Commission
@ 5% on ` 1,50,000 = 7,500
Del-credere commission @3% on 17,000
` 1,50,000 = 4,500
Dec. 31 To Provision for expenses (bank 260
charges)
To Profit and loss A/c (profit on 20,740
consignment)
1,50,000 1,50,000

B’s Account

2019 ` 2019 `
Dec. 31 To Consignment A/c 1,50,000 Dec. 31 By Consignment A/c-
Clearance expenses 3,000
Selling expenses 2,000

© The Institute of Chartered Accountants of India

6.84 PRINCIPLES AND PRACTICE OF ACCOUNTING

Commission 7,500
Del-credere commission 4,500 17,000
By Balance c/d 1,33,000
1,50,000 1,50,000
2020 2020
Jan. 1 To Balance b/d 1,33,000 Jan. 5 By Bank A/c 1,33,000

Bank Account

2020 ` 2020 `
Jan. 5 To B’s account 1,33,000 Jan. 5 By Bank charges 260
Jan. 5 By Balance c/d 1,32,740
1,33,000 1,33,000

Provision for Expenses Account

2020 ` 2020 `
Jan. 5 To Bank charges 260 Jan. 1 By Balance b/d 260
260 260

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