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Consignment Concept

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23 views3 pages

Consignment Concept

Uploaded by

Mark Brian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CONSIGNMENT

A consignment constitutes the transfer of possession of merchandise without the transfer of title from
the owner, called the consignor, to another person, called the consignee. The consignee acts as an agent
in behalf of the consignor for the purpose of selling the goods for a commission.

The shipment of goods to the consignee is not treated as a sale. Although a transfer of goods has taken
place, it is not the intent of either the consignor or the consignee that sale and purchase has taken
place. Title of the goods remains with the consignor, and recognition of the sale is deferred until goods
are transferred to a third party by the consignee.

The merchandise is carried throughout the consignment as the inventory of the consignor, separately
classified as Merchandise Inventory on Consignment. It is not recorded as an asset on the consignee’s
books. Upon sale of the merchandise, the consignee has a liability for the net amount due the consignor.

Consignment Accounting

When an entity delivers its product to a dealer for distributor for sale to end customers, the entity needs
to determine whether the contract is a sale or a consignment arrangement.

SALE The dealer or distributor has Recognize revenue when the product is shipped
obtained control of the product or delivered to the dealer or distributor
(depending on the terms of the contract)
CONSIGNMENT The dealer or distributor has Recognize revenue when the dealer or
not obtained control of the distributor obtains control of the product (i.e.
product after a specified period of tie expires)

A common principal-agent relationship involves consignment, in these cases, manufacturers (or


wholesalers) deliver goods but retain title to the goods until they are sold.

Rights and Responsibilities of the Consignee


Before goods are transferred on consignment, a written agreement should specify clearly the intent of
the parties. The agreement should address such issues as the amount and type of the consignee’s
expenses to be reimbursed by the consignor, how the consignee’s commissions are to be computed,
when commissions are to be paid, the credit terms and conditions, if any, to be considered by the
consignee in granting credit, and the responsibility for collection of receivables. The agreement should
be complete and attempts to avoid potential points of conflict. For items not provided for in the
agreement that result in litigation, the laws of bailment and agency apply.

Accounting by the Consignor

The journal entries to be made on the books of the consignor vary, depending on:

 Whether consignment transactions are recorded in separate ledger accounts for the purpose of
determining profits on consignment sales, or are simply combined with the regular account
balances, and
 Whether a perpetual or periodic inventory systems issued.
Because title to the merchandise is held by the consignor but physical possession is held by the
consignee, special accounting records must be maintained by the consignor for control purposes. No
revenue is recognized until a sale is made by the consignee. Upon shipment of the merchandise by the
consignor, an inventory account is established on the consignor’s books to identify the consigned
merchandise. Any consignment expenses paid by the consignor are added to the inventory balance as
added costs. The consignee does not make an entry for the receipt of the inventory in the general
ledger; however, memorandum control records usually are kept. Any reimbursable expenses paid by the
consignee is charged to a receivable account by consignee and added to the inventory balance by the
consignor. When a sale is made, consignor recognizes the sale as revenue according to one of the
revenue recognition methods, and the consignee recognizes the commissions as revenue on the
transaction.

Consignor’s:

1. Consignment transactions recorded separately – this method determines consignment profit


separate from regular sales. An inventory account called as inventory on consignment is issued
to record transactions in relation to consignment.

Inventory on consignment account is debited for:

 Cost of goods shipped on consignment


 Expenses related to consignment incurred by the consignor
 Reimbursable expenses related to consignment paid by the consignee

Inventory on consignment account is credited for:

 Cost of goods returned by the consignee


 Cost of consignment sales and expenses relating to consignment
2. Consignment transactions not recorded separately – consignment transactions are treated like a
regular type sales. Determination of consignment profit is not required because it is already part
of the profit of the entire entity

Accounting by the Consignee

Accounting procedures established by the consignee must recognize that goods received on
consignment are not owned. However, as noted earlier, the consignee must:

 Maintain records and controls that permit the identification of


a. Goods held on consignment and
b. Related receivables and reimbursable expenses, and
 Prepare periodic reports. The consignee normally creates a special account: Consignor
Receivable or Consignor Payable

Consignee’s

1. Consignment transactions recorded separately – under this method, two accounts are needed
to be maintained in relation to consignment transactions:

Consignor receivable account is:


 Debited for expenses paid by the consignee but chargeable to the consignor
 Credited when remittance is made to the consignor

Consignor payable account is:

 Credited for the sales by the consignee


 Debited when remittance is made to the consignor
2. Consignment transactions are not recorded separately – consignment transactions are treated
like a regular type of sales. Determination of consignment profit is not required because it is
already part of the entire entity

Consignment Sales

The accounting procedures regarding consignment sales under PFRS 15 still remains and for purposes of
overview regarding the application of PFRS 15 on consignment which is similar to PAS 18 are as follows:

 Manufacturers (or wholesalers) deliver goods but retain title to the goods until they are sold
 Consignor (manufacturer or wholesaler) ships merchandise to the consignee (dealer), who is to
act as an agent for the consignor in selling the merchandise. Consignee makes a commission on
the sale
 Consignor makes a profit on the sale and carries merchandise as inventory.

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