CHAPTER: CONSIGNMENT ACCOUNTING

Marks Covered: 10-15

AUTHOR’S RECOMMENDATION
Before starting this chapter, students are advised to have concepts of followings:
 Complete concept of journal entries
 Matching concept
 Valuation of Stock
 Trading & Profit & loss Account

OVERVIEW OF THIS CHAPTER

Concept no 1: Introduction ………………………………………………………………...

Concept no 2: Some terminologies used in consignment …………………………………
Concept no 3: Features of consignment ……………………………………………………
Concept no 4: Difference between sales and consignment ………………………………...
Concept no 5: Accounting for Consignment in the books of consignor …………………...
Concept no 6: Journal entries in the books of consignor…………………………………...
Concept no 7: Valuation of consignment stock ……………………………………………..
Concept no 8: Goods invoiced above cost / with loading ……………………………………
Concept no 9: Abnormal loss ………………………………………………………………...
Concept no 10: Normal Loss …………………………………………………………………
Concept no 11: Commission & its types ……………………………………………………...
Concept no 12: Accounting in the books of consignee ………………………………………
1. Introduction:
Consignment is a commercial arrangement where one party (called consignor)
sends goods to another party (called consignee) to be sold by consignee on the behalf of consignor
for certain mutually agreed commission. Under consignment, goods are sold by consignee to
customers on the behalf of and at the risk of consignor.

2. Some terminologies used in consignment accounting:

 Consignment: An arrangement where goods are sold by consignee to customers on the behalf
of consignor.
 Consignor: The person who sends goods to consignee.
 Consignee: The person whom goods are sent and the person who sells goods to customers
on the behalf of consignor.
 Proforma Invoice: A statement sent by consignor to consignee which includes the details
regarding goods sent to consignee. It is not real invoice or bill.
 Account Sale: A statement sent by consignee to consignor regarding consignment goods sold,
expenditure incurred, commission and the balance due to consignor.
 Outward & Inward Consignment: For consignor, consignment arrangement is ‘ Outward
Consigment’ and for consignee, consignment arrangement is ‘ Inward Consignment’.

3. Features Of Consignment
 The relationship between consignor and consignee is that of principal and agent.
 Risk and ownership of the goods remains with consignor.
 Consignor sends proforma invoice (not actual invoice) to consignee.
 Consignor may reimburse the expenditure incurred by consignee on the behalf of consignor as
per agreement made between them.
 Consignee receives remuneration i.e. commission for the goods sold. Commission can be
ordinary or del-credere.
 Consignee sends a statement called account sale to consignor.
 Normally, consignee gives advance to consignor in the form of cash or bill of exchange and it
will be adjusted with sale proceeds of goods.

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4. Difference between consignment and sales:

Basis Consignment Sales

Ownership Ownership of the goods rests with the The ownership of the goods transfers
consignor till the time they are sold by the with the transfer of goods from the
consignee, even though the goods are seller to the
transferred to the consignee. buyer.
Relations The relationship between the consignor and The relationship between the seller
the consignee is that of a principal and and the buyer is that of a creditor
agent. and a debtor.
Risk and Consignee holds the goods at the risk of Any subsequent damage to the goods
Damage the consignor therefore the subsequent is the loss of the buyer.
damage to goods is the loss of the
consignor.
Return of The consignee can return the unsold goods Goods sold are the property of the
goods to the consignor. buyer and can be returned only if the
seller agrees.
Expenses Expenses done by the consignee to receive Expenses incurred by the buyer are
after the goods and to keep it safely is borne by to be borne by the buyer himself
Delivery the consignor. after the delivery of goods.
Forwarding profoma invoice. invoice bill.
letter

5. Accounting for Consignment In the books of Consignor:

Consignment account is prepared
in order to ascertain profit & loss made on the consignment separately. It is prepared by consignor
for each consignment. Consignment account is profit & loss account in respect of transactions
related to consignment. For ascertaining profit & loss account, we put down the cost of goods sent
on consignment and expenditure incurred on debit side and sales proceeds and cost of goods
remaining unsold lying with consignee on credit side and remaining balancing figure will be taken as
profit or loss on consignment.

6. Journal Entry in the books of consignor ( Refer as given in ican book)

Illustration 1 ( We will do in class)

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7. Valuation Of Consignment Stock:
Principally, Stock is valued at cost or net realizable value
whichever is lower. Cost of consignment stock includes cost of goods plus proportion of non-
recurring expenses incurred upto the goods reach the premises/godown of consignee. Such expenses
includes 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 charge, salesman salaries are not included while calculating cost of consignment
stock. Following principal is followed for valuation of unsold stock lying with consignee:
 Cost of goods, proportion of consigner's expenses and proportion of expenses incurred up to the
goods reach the premises/go-down of consignee should be considered.
 In case of lack of adequate information regarding consignee's expenses, proportion of non-
recurring expenses incurred by consignee should be considered.
 If information is not clear about expenses incurred by consignee, then such expenses should be
excluded for valuation of unsold stock by writing suitable note.

Example:
Cost of goods sent to consignee = 10,00,000
Consignor’s expenses = 100,000
Consignee’s expenses= 200,000
At year end, Only 70% of goods sent were sold by consignee. Calculate value of closing stock.
Solution,
Valuation of closing stock:
Cost of closing stock = 300,000
(10,00,000*30%)
Add:
Consignor’s expenses= 30,000
(100,000*30%)
Consignee’s expenses ** =

Value of closing stock= 3,30,000

**(since consignee’s expenses is not clearly given whether it is recurring or non recurring
expenses, we ignore it for valuation of closing stock)
If consignee’s expenses was given as non recurring expenses in question, then our solution
will be:
Cost of closing stock = 300,000
(10,00,000*30%)
Add:
Consignor’s expenses= 30,000
(100,000*30%)
Consignee’s expenses = 60,000

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 (200,000*30%)
Value of closing stock= 3,90,000

Illustration 2 (we will do in class)

8. Goods Invoiced Above Cost/ With loading:

Sometimes consignor sends goods to consignee by
adding some profit margin i.e above the cost. In that case, value of goods sent to consignee and
consignment stock at the end include not only cost of goods but also a profit margin added by
consignor. To calculate real profit & loss of consignor on consignment, we need to remove the profit
margin added by consignor on cost of goods sent and on consignment stock while preparing
consignment account. Initially we pass entries at invoice price i.e cost plus margin and later we pass
additional entries to remove loading amount i.e. profit portion.
Example:
1) If goods are sent to consignment costing Rs 100,000 at profit of 25% on cost i.e. invoice price
1,25,000 then our entry will be:
Initial entry at invoiced price
Consignment Account Dr 125,000
To, Goods sent on consignment 125,000
Additional entry to remove profit margin (loading amount)
Goods sent on consignment Dr 25,000
To, Consignment 25,000
2) If in above example no 1, 30% goods remains unsold then our entry for stock will be:
Initial entry at invoiced price
Stock on consignment Dr 37,500
To Consignment A/c 37,500
(125,000*30%)
Additional entry to remove profit margin (loading amount)
Consignment Dr 7,500
To, Stock reserve A/C 7,500
(37,500/125% *25%)
Illustration 3 (We will do it in class)

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9. Abnormal Loss:
Abnormal losses are those losses which are avoidable, accidental and not natural
like theft, fire etc. Treatment of abnormal losses are just like the treatment of closing stock on
consignment account i.e we credit abnormal losses in consignment account by following matching
concept. Ultimately, abnormal loss will be transferred to general profit & loss expenses account on
expenses side. Valuation of abnormal losses depends upon the location of its occurrence. Abnormal
loss may occur in transit or in godown of consignee. If abnormal loss occurs in transit, then we add
only consignor’s proportionate cost to cost of lost goods to arrive at value of abnormal loss because
consignee’s expenses does not incur for the goods lost in transit and if abnormal loss occurs in
godown of consignee, then we also add consignee’s cost to arrive at value of abnormal loss.
Valuation of abnormal Loss

If occurs in transit If occurs in godown of consignee

Cost of goods lost = xxx Cost of goods lost = xxx

Add: Add:
Proportionate consignor’s expenses = xxx Proportionate consignor’s expenses = xxx
Value of abnormal loss xxx Proportionate consignee’s expenses = xxx
(non recurring)
Value of abnormal loss xxx

Example:
Mr X sent goods costing Rs 200,000 to Mr Y on consignment basis. 10% of the goods lost by
theft (abnormal loss). Consignor’s expenses while sending goods is Rs 20,000 and consignee’s
expenses are as follows:
Recurring expenses 10,000
Non-recurring expenses 20,000
Find value of abnormal loss 1) if goods are lost in transit. 2) if goods are lost in godown of
consignee.

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 Solution,

1) If goods are lost in transit:

2) If goods are lost in godown of consignee:
Cost of goods lost (200,000*10%) = 20,000
Add: Cost of goods lost (200,000*10%) = 20,000
Proportionate Consignor’s Expenses= 2,000 Add:
( 20,000*10%) Proportionate Consignor’s Expenses= 2,000
Value of abnormal loss = 22,000 ( 20,000*10%)

Proportionate Consignee’s Expenses= 2,000

(20,000*10%)
Value of abnormal loss = 24,000

10. Normal Loss:

Normal losses are natural and unavoidable i.e. we can’t avoid such loss. These may
arise due to normal causes like breaking in bulk, evaporation, drying etc. No any efforts can prevent
these losses. When normal losses occur, we spread total cost of goods over remaining goods after
normal loss. Cost per unit is calculated by dividing total cost of goods by remaining units of goods
after normal losses. Normal losses decreases quantity of goods and increases cost per unit but total
cost remains the same. There is no need to pass any entry in consignment in case of normal loss. It
will only affect cost per unit while valuating closing stock.
Example:
Total units sent on consignment with cost = 10,000 units @ Rs 10 per unit
Unavoidable loss (normal)= 10%
Freight Expenses incurred while sending goods = 8,000
Closing stock = 1,000 units
What is the treatment of normal loss and value of closing stock ?

Solution,
There is no treatment of normal loss in consignment account, it only affects cost per unit for
valuation of closing stock as given below:
Total cost of 10,000 units :
Cost of goods = 10,000 X 10 = 100,000
Add: Freight Expenses = 8,000
108,000
Remaining goods (units) after normal losses= 10,000-10,000 X 10% = 9,000 units
Cost per unit = Total Cost
Total remaining units

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 =
108,000
9,000 units
=12 per unit
Value of Closing stock = 1,000 units X 12 per unit = 12,000

Illustration 4 (We will do in class)

11. Commission & its types :

Commission is the remuneration received by consignee from consignor
for selling the goods on the behalf of consignor. Rate & type of commission is specified in
agreement concluded between consignor and consignee. Generally, commissions are of following
types:
Types of Commission

Ordinary Commission Del Creder Commission Overriding Commission

 Most common form of commission.  An additional commission for additional Additional commission given for increasing
 It is given as certain percentage of sales of  service. Sales of new and slow moving products.
or certain amount per unit of sale.  It is given by consignor for minimization It is an extra commission above normal
Example: 10% on sales , Rs 2 per unit of of risks of bad debts i.e. now bad debt will commission for extra efforts. Example: 5%
Goods sold. be borne by consignee him/herself. of sales amount above Rs 500,000. If six
 It is normally given on percentage basis lakhs sales made,
then additional commission will be:
100,000 x 5% = 5,000

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12. Accounting in the books of consignee:
We will discuss the entries in class as given in page number
404 of ICAN book.

Illustration 6 to illustration 12 (we will do in class)