Consignment Sales

A consignment sale is an arrangement whereby the owner of the goods transfers possession of the same
to a third party, the agent, so the latter may sell it to customers. In accounting for consignment sales,
the owner is called consignor, and the seller, consignee.

There will be no transfer of title over the goods upon the shipment from the consignor to the consignee;
it will occur when the goods are sold by the consignee to the ultimate buyer. The consignor owns the
goods until sold even though they are in the meantime held by the consignee and cared for as if they were
its own.

Two types of costs are incurred in a consignment arrangement. The first type pertains to costs incurred
upon the transfer of goods from the consignor to the consignee; at their desired condition, to the agreed
destination. These costs are deferred and allocated to the cost of sales and to the ending inventory of the
consigned goods. One
deferral method is to capitalize these items as additional cost of the consigned goods to achieve
simultaneous allocation. Some examples are: (a) shipping, freight, and handling costs; (b) insurance
premium on consigned goods; and (c) assembly or reconditioning costs on consigned goods.

The second type pertains to costs incurred by the consignee in selling the goods to individual customers
and includes commissions earned for selling the goods. These costs are expensed in full immediately by
the consignor. Some examples are (a) advertising, delivery, and installation of sold units; (b) insurance
premium while in transit to the buyer; and (c) reconditioning or repair of already delivered units to
customers.

To understand the mechanics of the arrangement, the following is a simple example.

G Corporation consigned 10 dozens of fine men’s suit at a cost of P1,000 a suit to C Enterprises. Shipping
costs of P300 per dozen were incurred by G. C is to earn a 15% commission on sales. A month later, C
reported sales of 7 dozens of the suit at P2,000 a suit and paid expenses of P2,000 for the delivery of the
sold units to various customers.

An ACCOUNT SALES may be prepared by C to support her remittance to G as follows:

Sales (84 men’s suit at P2,000) P 168,000
Less: Sales Commissions (P168,000 x 15%) P 25,200
Delivery Expenses 2,000 27,200
Remittance enclosed P 140,800

The CONSIGNMENT PROFIT of G on this consignee for the month is computed, as follows:
Sales, per account sales P168,000
Less Cost of sales [(120 suits x P1,000) + (10 dozens x P300)]x 7/10 86,100
Gross profit P 81,900
Expenses: Sales Commissions P 25,200
Delivery expenses 2,000 27,200
Net profit P 54,700

Please note that the shipping cost of the consigned goods, P3,000, was deferred as additional cost of the
consigned goods and then allocated to cost of units sold, P2,100 and to the cost of the inventory of unsold
units, P900.

The inventory of consigned goods held by the consignee to be reported by the consignor will be reported
as follows: Cost of the suits not sold (36 suits x P1,000) P 36,000 Allocated deferred shipping cost
(P3,000 x 3/10) 900 Total P 36,900

If the shipping cost of consigned goods of P3,000 (10 dozens x P300) is paid by the consignee (rather than
by the consignor) upon receipt thereof, the cash remittance will only be P137,800, P3,000 lesser than the
initial amount of P140,800 under the original account sales.
But the net profit for the period and the ending inventory of consigned goods to be reported by the
consignor will be the same, because the shipping cost of P3,000 is to be deferred regardless of which
party paid for it.

METHODS OF ACCOUNTING FOR THE CONSIGNMENT PROFIT BY THE CONSIGNOR

In accounting for consignment sales, the consignor may select an accounting process that will measure
consignment profits in one of two ways: (a) profits merged together for all consignees or (b) profits
determined for each consignee. The accounting plan and the chart of accounts will be based on the
alternative systems adopted.

Consignment Profits Not Determined Separately for Each Consignee.

From the standpoint of the consignor, its consignment sales, cost of consignment sales, advertising
expenses, and commission expenses, etc. are a combination of like items from all consignees during the
period and comprise the total for each of these items in the income statement. On the other hand, the
inventory of consigned merchandise still held by all consignees at the end of the period, combined
together, will be the total inventory of consigned merchandise to be shown on the balance sheet of the
consignor.

Using the previous example, the journal entries to account for the consignment transactions in
the books of the consignor and of the consignee, if profits will not be determined separately,
follows:
Books of consignor Books of Consignee

Invtry on P120,000 Memo entry

Consignment

Merchandise P120,000
Invtry

Invtry on 3,000 No entry

Consignment

Cash 3,000

No entry Consignor receivable P 2,000

Cash P 2,000

No entry Cash 168,000

Consignor payable 168,000

Cash 140,800 Consignor payable 168,000

Delivery expense 2,000 Consignor 2,000

receivable

Commissions expense 25,200 Commissions revenue 25,200

Consignment 168,000 Cash 140,800

sales

Cost of goods sold 86,100 Memo entry re: the number of consigned units still
held.
 Invtry on 86,100
Consignment

Consignment Profits Determined Separately for Each Consignee.

Under this approach, a Consignment-Out account is set up in the books of the consignor for every
consignee and a Consignment-In account is set up in the consignee’s records to account for the
consignment transactions in their respective records.

The Consignment-Out account will be debited for the cost of the goods consigned; costs and expenses
paid by the consignor; costs and expenses paid by the consignee, and consignment profit. It will be
credited for consignment sales and for the cost of consigned goods returned to the consignor.

The Consignment-In account will be debited for the costs and expenses incurred by the consignee and for
the commissions it earns from the arrangement. It will be credited for the amount of consignment sales.
Receipts of consigned goods from the consignor, as well as returns, if any, to the consignor are by memo
entries only

Continuing with the previous example, the journal entries to be recorded if the consignment
profit will be determined separately for each consignee, follows:
BOOKS OF CONSIGNOR BOOKS OF CONSIGNEE

Consignment Out P120,000 Memo entry

Mdse inventory P120,000

Consignment out 3,000 No entry

Cash 3,000

No entry Consignment In P 2,000

Cash P 2,000

No entry Cash 168,000

Consignment In 168,000

Cash 140,800 Consignment In 168,000

Consignment Out 27,200 Consignment In 2,000

Consignment Out 168,000 Commissions revenue 25,200

Cash 140,800

Consignment Out 54,700 No entry

Consignment profit 54,700

It will be noted from the above that the balance of the Consignment-Out account after the entry for the
recognized consignment profit is P36,900, (P120,000 + P3,000 + P27,200 – P168,000 + P54,700) which is
the cost of the ending consigned inventory still held by the
consignee. On the other hand, the Consignment-In account is closed because it has remitted all the
sales proceeds to the consignor, net of reimbursable expenses and the commissions it earned. The cost of
the remaining unsold units is not formally recognized in the consignee’s records because it does not own
the goods.

An adjusting entry to reclassify the Consignment-Out account must be recorded in order that items and
accounts embedded in it will be recognized in the accounting records and in the financial statements, as
follows:

Cost of sales P 86,100

Delivery expenses 2,000
Commission expenses 25,200
Consignment profit 54,700
Consignment sales P168,000

Inventory on consignment P 36,900

Consignment-Out P 36,900

A reversing entry must be recorded at the beginning of the next period to restore the Consignment-Out
account at its original balance.

Consignment-Out P 36,900
Inventory on consignment P 36,900

ILLUSTRATIVE EXERCISES
Case 1. TRIPLE E consigned 10 units of 42” television sets to BRAD Appliances, Inc. The cost to TRIPLE
E per set is P25,000 and BRAD was instructed to sell each at P35,000 for a 10% sales commission to
BRAD. Freight charges paid by TRIPLE E on the delivery of the consignment to BRAD was P5,000. BRAD
was able to sell 8 television sets and incurred delivery and installation costs of P3,000 for the delivered
units.
Required:
1. Prepare an account sales.
2. Compute the net profit of the consignor from the consignee sales.
3. Compute the cost of the unsold TV sets still held by the consignee.
4. Prepare journal entries in the books of the consignment parties assuming profits are not
determined separately.

Case 2. On August 1, 2019, SARITA Company consigned 20 units of gas oven to GIRLIE Store. The cost
of each unit is P12,000 and GIRLIE was instructed to sell each for P20,000 for a 5% commission.
Shipping costs of P4,500 was paid by GIRLIE upon receipt of the consigned goods from SARITA.
Additional shipping cost by GIRLIE on the sale of 12 units was P5,000. Full cash remittance was made by
GIRLIE, net of commissions and reimbursable expenses, on December 31, 2019.
Required:
1. Prepare an account sales.
2. Compute the consignor’s profit from consignee sales for the month.
3. How much will be the debit balance of the Consignment-Out account after adjustments for the
consignee.
 Case 3. The Consignment-Out ledger account for the month of July, 2019 in the accounting records of
EDMOND COMPANY follows:
CONSIGNMENT –OUT of MYLENE, Inc.

Date Particulars Debits Credits Balance

July 4 Shipped 80 units P11,520 P11,520dr

4 Freight costs 936 12,456 dr

31 Charges by consignee:

Assembly costs 360 12,816 dr

Commissions on sale 2,625 15,441 dr

31 Selling price of 50units P13,125 2,316 dr

EDMOND COMPANY debited the Consignment-Out account for all costs relating to the consignment
and credited the Consignment-Out account for the selling price of units sold by the consignee.

Required:
1. Prepare the journal entry to record the consignment profit in the books of the consignor.
2. Prove the adjusted balance of the Consignment-Out account, after the recognition of profit, is equal with
the cost of unsold units still in held by the consignee.
3. Prepare a reclassification entry for the Consignment Out account for financial statement purposes of
the consignor.