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ACCOUNTING AND AUDITING

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CONSIGNMENT
INTRODUCTION

To consign means to send.

In Accounting, the term “consignment account” relates to accounts dealing with a situation where one person (or entity)
sends goods to another person (or entity) 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 sends 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.

DIFFERENCE BETWEEN

COMMISSION AND DISCOUNT

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

CONSIGNMENT AND SALE

S.No Consignment Sale

.
1. Ownership of the goods rests with the The ownership of the goods transfers with the transfer
consignor till the time they are sold by the of goods from the seller to the buyer.
consignee, no matter the goods are transferred
to the consignee.

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

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 and loss account in respect of the transactions to which it relates.
The consignor records the following transactions in his book of accounts:
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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

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

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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

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

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

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.

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To Bad Debts Account

(b) When del-credere commission is allowed

Commission Account Dr.

To Bad Debts Account

COMMISION

1. Ordinary -
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.

2. Special commission
a) Del-Credere –
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.

b) Overriding –
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.

NORMAL LOSS AND ABNORMAL LOSS

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.

NORMAL LOSS IS ALWAYS CHARGE ON GOOD UNIT

GOOD UNIT = Total Unit – Normal loss unit

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 = 50000

Expenses = (20×10,000)/1000 = 200

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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.

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.

Abnormal loss is always calculated at cost even if invoice price of goods is given.

ABNORMAL LOSS – Fire Theft or Accident in Transit

Valuation of abnormal loss

Add Cost of abnormal loss

Add: Proportionate expenses by consignor

Add Proportionate expenses by consignee (if reimbursed by consignor)

(IF LOSS OCURRED AFTER REACHING AT CONSIGNEE)

ABNORMAL LOSS – DIKHATE HAI

NORMAL LOSS – NAHI DIKHATE

EXPENSES IN CONSIGNMENT

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 also known as direct expense/Recurring Expense. 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) also known as indirect expenses are not treated as part of the cost of purchase for valuing inventories on
hand.

ACCOUNT SALE

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
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(f ) Balance payment due or remitted.

It is a summary statement and is different from Sales Account

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.

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.

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 making stock reserve

VALUATION OF INVENTORIES / UNSOLD STOCK

Value of inventories always valued at invoice price if invoice price is given.

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.

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.
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Conclusion: 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.

LOADING IN CONSIGNMENT

Loading in Consignment means PROFIT

Cost Price100, Sales Price 120, Profit = 20
Loading on
Cost Sales
1/5 1/6
1/4 1/5
1/3 1/4
1/2 1/3

Loading is generally find out in 4 things

1. Opening stock
2. Closing Stock
3. Goods sent on consignment
4. Goods sent on consignment returned