Consignment Accounts MEANING OF CONSIGNMENT A business grows by approaching the maximum number of customers.

For this purpose branches may be opened in different places. However, the most popular method is to enter into an agreement with a local trader who can sell goods. Manufacturers and wholesalers, with a view to increase their sales, appoint agents who sell goods on their behalf. This relationship created between the parties is that of an agent and a principal. This relationship between the sender of goods (consignor) and receiver of the goods (consignee) is called consignment. Accounting to Frank Wood, A consignment of goods is the sending of them by the owner ( the consignor) to his agent ( the consignee) who agrees to collect and sell them on behalf of the owner. In simple words, consignment is the dispatch of goods to an agent for the purpose of their ultimate sale. There are two parties involved in a consignment transaction: (a) Consignor i.e. the person sending goods for sale. (b)Consignee i.e. the person to whom goods are sent.

FEATURES The man features of consignment are as under: (i) (ii) Consignment is mere transfer of possession goods. The ownership of goods lies with the principal. The agent (or consignee) sells the goods on account and at the risk of the principal. It implies that the profit or loss resulting from the sale of goods will yield to the principal. The unsold goods are returned by the agent to the principal. The principal pays the agent and agreed commission on the sale as well as expenses which he incurs in selling the goods. The agent is not liable for any loss or destruction of goods held by them.

(iii) (iv) (v)

(vi)

The relationship between consignor and consignee is that of principal and an agent. NEED FOR OR IMPORTANCE OF CONSIGNMENT

A manufacturer or a wholesaler may not possess the knowledge of conditions prevailing in markets abroad or in home markets situated at distant places. In such a case, a local agent in these markets will be of much help in selling the goods ( on behalf of the sender) profitably. Apart from this, when the distance between the sellers and the prospective buyer is much, the seller can ensure prompt delivery to and regular contacts with the buyers when it keeps his stock with such local agents and distribute through them. Thus, consignment helps manufacturers and wholesalers to increase their sales and enjoy the fruits of larger scale production. DISTINCTION BETWEEN CONSIGNMENT AND SALE. Sale means transfer of ownership. Under sale, property or ownership in goods passes to the buyer consequently. The buyer is bound to pay for the goods whether he is ultimately able to dispose them off or not. Following are the points of distinction between sale and consignment: Basis of Distinction 1. Property ownership 2. 3. Sale of Ownership of goods Passes to the buyer. Consignment

4.

5.

6.

Ownership of goods remains With the consignor. Return of The buyer cannot return Goods may be returned at Goods The goods unless any time. otherwise agreed Expenses After the sale, exdepenses Expenses by consignee incurred by the buyer are bore by the consignor. have to be borne by buyer only. Mutual The relations terminate as The relations are of Relations soon as goods principal and agent and Are delivered and continue too terminated. payment is made. Payment Payment is made Payment is made as and immediately on sale or as when goods are sold; agreed. otherwise no payment is due. Risk of Goods Risk of goods remains with Risk of goods remains the buyer since he is the with the consignor since

owner of the goods. 7. Profit or loss 8. Account Sales

he is the owner of the goods. After the sale is complete, Profit or loss on sale the profit or loss belongs belongs to the consignor. to buyer. No account sales in Consignee periodically prepared by the buyer and prepares and sends sent to the seller. account sales to the consignor.

TERMS USED IN CONSIGNMENT (1)Consignor or Principal: Consignor is a person who sends goods to the consignee for the purpose its sales at the risk of the consignor. Consignor continues to be the owner of the goods until they are sold by the consignee. Consignor has to bear all the expenses incurred by the consignee. (2)Consignee or Agent: Consignee is a person to whom goods are sent and who sells the goods. He is entitled to get reimbursement of all expenses incurred by him. He receives commission for his service. (3)Proforma Invoice: Proforma invoice is a statement containing the details of goods consigned i.e. quality, quantity, price of goods, details of expenses incurred etc. Thus, proforma invoice gives all details as given by an invoice. But the word proforma invoice gives all details as given by invoice. But the word, proforma is added before it because the actual sale of goods has not taken place and invoice is sent only when actual sale has taken place. (4)Account sales: Account sales is a statement or account containing the details of goods sold, expenses incurred, commission charged on sales and net amount due to the consignor. Account sales is sent by the consignee to the consignor periodically or on the completion of the consignment. On the basis of account sales, the consignor passes necessary accounting entries in the books. (5)Advance on Consignment: When the goods are sent by the consignor, he continues to the owner of goods. Thus, , consignor does not become creditor of the consignee and consignor can not creditor of the consignee and consignor can not demand the price of the goods. But as a general practice, it is agreed upon between consignor and

consignee that on receipt of goods, the consignee would deposit a certain sum of money or accept a draft as security against the goods consigned to him. This security deposit is treated as advance payment from the consignee and shown as a liability in the books of the consignor. It is finally adjusted in the account sales sent by the consignee to determine the net amount due to consignor. (6)Discounting of Bills: When the consignor gets the bill of exchange duly accepted by the consignee, he may get it discounted from his bank. The discounting charges may be dealt in any of the following two ways: (a) Discounting charges may be debited to General Profit and Loss Account as all other expenses are debited to this account. It means that discounting charges is not considered as an expense of consignment. (b)Discounting charges may debited to Consignment Account if it is treated as an expenses of consignment. Experts are of opinion that former approach is to be adopted i.e discounting charges should be debited to General Profit and Loss Account. (7)Commission: Commission is the reward or remuneration given by the consignor to the consignee for his services as an agent. The commission is generally a fixed percentage of gross sale proceeds. Commission payable to a consignee may be of following types: (a) Ordinary Commission or Commission on Sale Proceeds: Commission means commission on sale proceeds i.e. ordinary commission. This commission is a fixed percentage on sale proceeds. (vii) Del Credere Commission: Del Credere commission is a special of agents special commission payable by the consignor to the agent in consideration of agents special services undertaken by him e.g. the risk of bad debts arising out of credit sales. Thus, Del Credere Commission is a debts arising out of credit sales. Thus, Del Credere commission is a payment for an insurance against the risk of bad debts. When this commission is to be paid to the agent, the responsibility of assuming bad debts lies on t agent and consignor receives the total amount of gross sale proceeds whether actually

recovered by the agent or not. Such commission is generally payable on the total sales, unless otherwise stated. (viii) Over-riding Commission: Over-riding commission is paid over and above the ordinary commission. The objective of over-riding commission is to motivate the consignee to boost the sale of new product or to ensure the sales at the highest possible price. Overriding commission is calculated on the surplus sale proceeds realised over the above the minimum sale price fixed by the consignor.

8) Consignment Expenses: When the goods are sent on consignment various expenses are incurred by the consignor and /or consignee. Such expenses are called consignment expenses. Consignment. Such expenses are part of total cost of the goods at the point of sale. Such expenses may be incurred by consignor or consignee or by both. (b) Recurring or Indirect Expenses: All those expenses which are incurred after the goods have reached the selling place of consignee are recurring expenses. Such expenses are generally incurred by the consignee. Consignment Expenses: Non-recurring Or Direct Expenses Incurred by the Consignor Consignee (i) (ii) (iii) (iv) (v) (vi) Packing or Indirect Expenses Incurred by the Consignee Incurred by Recurring

(i) Unloading Charges

(i) Warehouse Charges (ii) Insurance (iii) (iv)Salaries (v) Advertising (vi) Expenses on Brokerage

Carriage of Cartage (ii) Dock Dues Dock Dues Freight (iii) Customs (iii) Octroi (v) Carriage

Transit Insurance Loading Charges

Goods damaged ( vii) Expenses on Goods returned (8)Consignment Stock: It is often seen that total goods sent on consignment is not a always sold away. That part of goods which remain unsold with the consignee is called consignment stock. In order to bring such unsold stock . Consignment stock is valued at market price or cost price whichever is less. Market price means Net Realisable Value (NRV) i.e. the value which shall be realized if unsold goods in stock are sold. The net realizable value should be calculated after deducting the variable sales expenses such as commission payable on the sale of such goods. Thus, Net Realisable Value: Sale Proceeds- Variable Sales expenses Cost price for this purpose is arrived at after including proportionate non-recurring (direct) expenses i.e. expenses which are incurred to bring the goods into saleable condition. Thus, Cost price of Consignment Stock - Cost of Goods+ Proportionate Direct Expenses If a part of goods is lost or destroyed, the value of stock in hand must be calculated after deducting such loss. 1. Arun sends goods on consignment to Anil to Kanpur. The terms are that Anil will receive 10% commission on the invoice price, 20% of any price relaised above the invoice price and 5% del credere commission. Arun sent goods whose invoice price was Rs. 2,00,000 Anil sold of the goods for Rs. 1,95,000. You are required to calculate commission payable to Anil. 2. Following information are made a available to you: (a) Goods consigned 10,000 units @ Rs. 30 per unit. (b)Expenses incurred by consignor Rs. 10,000

(c) Expenses incurred by the consignee: Unloading Charges Octroi Carriage Inward Storage Selling Expenses Office Expenses (d)Office Expenses 3,000 2,500 1,000 800 600 2,000

Rs.

8,000 units

Calculate the above value at which unsold stock is to be shown in the consignment stock if unsold stock can be sold at @ Rs. 32 per unit.

ACCOUNTING TREATMENT IN THE BOOKS OF CONSIGNOR A proper record of all transactions relating to a particular consignment is necessary for ascertaining net profit or loss on the consignment. For this purpose, a consignor maintains following three accounts. (i) Consignment Account: Consignment is a nominal account. The cost of goods and expenses are debited to this account and the sale proceeds is credited to it. Its balance is the profit or loss made on a particular consignment. Consignees Personal Account: It is a personal account. Consignees personal account is debited when the actual sales takes place. It is credited by the expenses incurred by him and commission due to him. Its balance shows amount due to him or amount due from him. Goods sent on Consignment Account: It is a real account. It is closed by transferring its balance to Purchase A/c or Trading A/c. Goods can be consigned consignee either at cost or at invoice price.

(ii)

(iii)

(iv)

(a) When goods are sent to consignee at cost. (b)When goods are sent to consignee at invoice price. 1. M/S Vani & Company of Delhi consigned 100 tape recorders to Venkatramna & Co. Hyderabad. The cost of each tape recorder was Rs. 500. The consignors paid insurance Rs. 500, freight Rs. 800. Account sales was received from Venkatraman & Co, showing gross sale proceeds of 80 tape recorders @ Rs. 600 each. The expenses paid and deducted by them were: Rs. Carriage 20

Establishment Expenses Commission @ 5%

130 2,400 ________ 2,550 ________ _________

Write out the Journal in the books of the consignor.

LOSS OF GOODS Goods sent on consignment may be lost, damaged or destroyed in the course of their transit or after they reach in the custody of the consignor. For the purpose of accounting treatment loss of goods may be classified as under: (a) Normal Loss, (b) Abnormal Loss. (b)Normal Loss: Normal loss is the loss which arises due the nature of product. Normal loss includes loss of weight, leakage, pilferage, evaporation breakage, dusting etc., Normal loss is recurring in nature and unavoidable and therefore can be estimated in advance from the past of the direct cost of consignment. As a result, cost of unsold stock increases proportionately. The principle is that the total cost of goods is considered to be for the quantity sent less the

normal loss. Thus, normal loss is considered only while calculating the cost of unsold stock. In short, cost of goods sent becomes cost of goods received. Value of closing stock is calculated as under: Value of Closing Stock= Total Value of Goods Sent ___________________________ * Units of Closing Stock Units Actually received by Consignee. (c) Abnormal Loss Abnormal loss is the loss which arises due to the external factors. Abnormal loss includes loss due to the accidents or due to negligence such as loss of goods due to flood, fire earth quakes, war riot, insects theft etc. Abnormal loss is unexpected such a loss do not occur quite often. Abnormal loss is insurable loss. Since abnormal loss has nothing to do with a particular consignment, it is not charged to any particular consignment account. Instead, abnormal loss is transferred to General Profit and Loss Account so that profitability of any particular consignment account, so as to nullify the effect of the debit already given at the time of consigning the goods. The value of abnormal loss is calculated in the same manner as the value of unsold stock. Thus, Value of Abnormal Loss= Cost of Goods + Proportionate Direct Expenses While calculating the value of abnormal loss, one should consider the timing of loss. The abnormal loss may occur either before the goods are received by the consignee i.e. loss during the transit of goods or after the goods are received by the consignee i.e. loss in the consignees Warehouse. When loss occurs during the transit, the non-recurring expenses incurred by the consignee would not be taken into account for valuing the abnormal loss because non-recurring expenses of the consignee must have been incurred on the goods received by the consignee (total goods sent-goods lost in transit). When loss occurs in the consignees warehouse, the non-recurring expenses incurred by the consignee would be taken into account for valuing the abnormal loss. DISTINCTION BETWWN NORMAL LOSS AND ABNORMAL LOSS Basis of Distinction Normal loss Abnormal Loss 1.Causes It arises due to It arises due to nature of the negligence and Product. Its causes accidents are internal It causes are` external to To nature of goods nature of goods. 2. Nature It is of recurring It is not of recurring nature nature 3. Avoidance It is unavoidable loss It is avoidable loss.

4. Insurance 5. Part of Cost 6. Accounting Treatment

It is non-insurance It is apart of cost and affects gross profit. No Journal entry is passed. Its value is adjusted by inflating the cost per unit. Remaining units bear the loss.

It is insurable. It is not a part of cost and affects net profit. Journal entry is passed. Its value is transferred to Profit and Loss A/c. Remaining units do not bear the loss.

Joint venture