Consignment Accounting

Dr. Khawar Naheed

• Consignment is a system where one person sends the goods to another
so that the latter can sell those goods on behalf of the person who sends
it in the first place. 
• Risk related to goods will be on the part of the consignor. Let us study
the consignment account in detail.
• Parties in Consignment Account
• There are two parties in a consignment.
• The person sending the goods is the consignor.
• The person receiving the goods is the consignee.
Meaning of Consignment and Distinction with Sale

• Modern tools of marketing have made it possible for businesses to increase their

sales exponentially every year. Entrepreneurs and firms have to routinely rely upon
consignment transactions to facilitate delivery of their products for this purpose.
Before we understand how we have to account for these transactions, let us first
deal with the meaning of consignment.
• Meaning of Consignment
• The act of consigning means to send. Since this word is used in the context of goods,
consigning means sending of goods. Consignment refers to handing over of goods
belonging to one person to another person without transferring ownership. People
indulge in this while undertaking shipping or transport of goods.
• Consignment, in simple words, means one person/firm sending goods to another
person/firm for selling them on behalf of the former. The owner of the goods only
transfers possession of the goods, he retains ownership over them.
• The purpose of a consignment transaction is to facilitate delivery or transport of
goods. The person who undertakes to keep and transport goods of others receives
a commission for his services. He has to take upon himself the responsibilities and
risks associated with the control over goods.
Accounting Treatment in the Books of Consignor

• The relationship between consignor and consignee is that of the principal and the 

agent. So entire profit or loss belongs to the consignor and consignee receives the 
commission as his remuneration.
• “Agent” has been defined under section 182 of the Contract Act 1872(hereinafter
referred as “the Act”), wherein it is stated that an “Agent is a person employed to
do any act for another or to represent another in dealing with the third person”.
• On the consignment of the goods, the consignor also sends a Performa invoice.
When the consignee remits money, he sends Account sale to the consignor.
• A proforma invoice is sent by Consignor to consignee. A Pro-forma invoice is a
document prepared by the consignor which is sent to the consignee along with
the goods. It contains the details with respect to the quantity of goods sent, rates
at which the goods are sent and other terms and conditions for sending the goods
on consignment.
• Parties to a Consignment
• Now that we know the meaning of consignment, it is now
noteworthy to understand that there are two parties to a
consignment transaction:
• Consignor or Principal: This is the party that sends the goods.
He is the actual owner of the goods.
• Consignee or Agent: This is the party that receives the goods.
He does not own the goods but just keeps control over them.
As the names suggest, the consignor and consignee have a
principal-agent relationship between them. The consignor is
principal for the consignee, who becomes his agent.
• Procedure of Consignment
• The first step in consignment happens when the consignor and consignee enter
into an agreement of consignment. The consignee agrees to accept possession
of goods from the consignor. They agree upon terms of their agreement and
the commission payable in this step.
• Next, the consignor hands over possession of goods to the consignee along
with a proforma invoice. This document contains details about the goods
transferred. Note that the consignor transfers only possession of goods and not
ownership over them.
• Further, the consignee now undertakes the transport and sale of these goods
under his custody. Generally, he is supposed to bear all the expenses of this. He
recovers all these expenses from the consignor later. The parties, however, are
free to change terms regarding expenses if they want.
• Finally, the consignee sends a statement called Account Sales to the consignor.
This document contains details like sales made by the consignee, the expenses
he incurred and commission payable to him. The consignor now pays
commission to the consignee for his services at agreed rates.
Consignment vs. Sale

• A consignment transaction might seem to be similar to a sale,

but it is actually different on the following grounds:
Journal entries in the books of Consignor
 Question
• Ram sent on 1st April 2016 to Sham goods costing Rs. 100000 and
spent Rs. 2000 on packing etc. On 3rd April 2016 Sham received the
goods and sent his acceptance to Ram and given Rs.60000 as
advance. Sham spent Rs.2000 on freight and cartage, Rs.1000 on
godown rent and 600 on insurance. On 31st Dec 2016, he sends his
account sales( along with the amount due to Sham) showing that
the sale is of 4/5 of the goods for Rs.110000. The terms of the
consignment entitle Sham to a commission of 10 %. One of the
customers turned insolvent and could not pay Rs.1200 due to him.
Show the necessary general entries in the books of the consignor.
Also, prepare ledger accounts.
Solution
Ledgers Accounts
Consignment to Sham A/c
 Accounting Entries in books of Consignee

• Goods on consignment are sent by the consignor or the principle to the

consignee or agent. The consignor is the owner of the goods and not the
consignee though the possession is transferred. However, after the goods are
sold the buyer becomes the owner of the goods. Here, we will discuss the 
accounting entries in the books of the consignee.
• Accounting Entries in books of Consignee
• There are no entries passed in the books of the consignee for the consignment
of goods sent by the consignee and also for any expenses incurred by the
consignor. However, the advance paid to the consignor, sales made, expenses
incurred on the consignment and commission earned needs to be recorded.
• A consignee is often allowed del-credere commission in addition to the usual
ordinary commission. In the case where he is allowed del-credere commission,
bad debts are borne by him and not the consignor.
Question:
On 1 October 2017 Zeal Ltd. sent goods costing Rs. 60000 to Kent Ltd. Packing charges were Rs. 2000. On 4 October
2017 Kent Ltd. received the goods and sent an advance of Rs. 40000 to Zeal Ltd. Kent Ltd. spent Rs. 3000 on cartage,
Rs.500 on insurance and Rs.1000 on godown rent.
On 31st March 2018, Kent Ltd. sent his Account Sales showing that 80% of the goods had been sold for Rs. 60000. It
also remitted the balance amount to Zeal Ltd. It is entitled to a commission of 12% including the del-credere
commission. One of the customers became insolvent and was unable to pay a sum of ₹1000. Pass the accounting
entries in the books of the Consignee.
Solution