CONSIGNMENT ACCOUNTS : A consignment is the despatchof goodsby a principal to his agents either within the same country or abroad,to be sold by the latter on behalf and at the risk of the former in consideration of a commission.The principal sendingthe goods is called the ‘consignor’ and the agentto whom the goods are sent is called the ‘consignee’. It is important to note the agency relationship here.Because it is an agency relationship, the consignor retains ownership of the goods until sale to the final customer: also, the consignee receives sale proceeds and pays expenses on behalf of the consignor.
Difference Between Sale and Consignment : A consignment is not sale by the consignor to the consignee.The goods are held by the consignee for sale.There is a change only in the location of the goods.The points of distinctionbetween a sale anda consignment areas follows :
(1) In caseof a sale,the property or ownership in the goods passes immediately to the buyer.In case of a consignment,the property in the goods does not pass to the consignee, but remains with the consignor.
(2) In case of a sale, the risk attaching to the goods passes along with ownership to the buyer.In case of consignment, the risk attaching to the goods does not pass to the consignee who acts as a mere agent.
(3) In case of a sale, the relationship between the buyer and the seller is that of a debtor and creditor.In case of a consignment, the relationship between the consignor and the consignee is that of principal and agent.
(4) A consignee can return the goods if they cannot be sold: but in case of a sale, the buyer cannot return the goods except for some special reasons, such as damage or wrong quality of goods.
Pro-Forma Invoice : Along with the goods, a statement is usually forwarded by the consignor to the consignee,giving a description of the goods consigned, the weight,quantity,price and other relevant details.The statement is known as a Pro-Forma Invoice.
A pro-forma invoice sent by a consignor to the consignee,does not charge the consignee with the value; it is intended as an evidence record of consignment and also as an indication of the price at or above which the consignor intends the goods to be sold.The price mentioned in the pro-forma invoice is called the pro-forma invoice price. The pro-forma invoice price may be the cost price of the goods sent,though usually it represents the selling price or the minimum price at which the consignee is expected to sell the goods sent to him.
Account Sale : When the whole of a consignment has been sold,the consignee renders to the consignor an account sale.An account sale is not a ledger account, but a statement showing particulars of goods sold,the gross proceeds of sale expenses incurred by and commission due to the consignee,and the net proceeds due to the consignor.
Consignee’s Commission : The consignee is remunerated by a commission which is usually calculated as an agreed percentage of the gross proceeds of sale
A consignee often gives such a guarantee (that is,an undertaking that he will pay if the purchasers do not)in return for an extra commission.This extra commission is known as del credere commission.
Accounting In The Books Of Consignor : When goods are despatched on consignment no entrycan be made in the sales Account as this is not a sale,and until the goods are sold, they remain the legal property of the consignor.
When goods are sent at cost price the usual journal entries are as follows :
1. For the cost of goods consigned
Dr. Consignment A/C
Cr. Goods Sent on Consignment A/C
2. For expenses paid by the consignor
Dr. Consignment A/C
Cr. Bank A/C
3. For any advance received from the consignee
Dr. Bank A/C or Bills Receivable A/C
Cr. Consignee A/C
NOTE : Any bill receives from the consignee as advance may be discounted.For discounting such Bill usual entry for discount is passed.For charging such discount against consignment A/C,is consignment A/C is debited and Discount on Bills A/C is credited.
4. For goods soldby the consignee
Dr. Consignee A/C
Cr. Consignment A/C
5. For expenses incurred by the consignee
Dr. Consigment A/C
Cr. Consignee A/C
6. For commission payable to the consignee
Dr. Consignment A/C
Cr. Consignee A/C
7.The balance of consignment Account will represent either profit or loss
(a)If there is a profit
Dr. Consignment A/C
Cr. Profit & loss A/C
(b)If there is a loss
Dr. Profit & Loss A/C
Cr. Consignment A/C
8.For amount received from the consignee in final settlement
Dr. Bank A/C
Cr. Consignee A/C
9.For closing Goods sent on Consignment A/C
Dr. Goods sent on Consignment A/C
Cr. Purchases A/C or Trading A/C.
Accounting In The Books Of Consignee : The entries may be summarised as follows :
1.For expenses incurred by the consignee on the consignment
Dr. Consignor A/C
Cr. Bank A/C
2.For any advance sent to the consignor
Dr. Consignor A/C
Cr. Bank A/C or Bills payable A/C
3.For sale of goods
Dr. Bank A/C
Cr. Consignor A/C
4.For commission receivable
Dr. Consignor A/C
Cr. Commission A/C (For eventual transfer to P/L A/C)
5.For final remittance tothe consignor
Dr. Consignor A/C
Cr. Bank A/C.
Credit Sales By Consignee : When the consignee is allowed to make credit sales,entries relating to such sales in the books of consignor and of consignee will depend upon whether the consignee is paid del credere commission or not .
(1)Inthe books of consignor :-
(a) When no del credere commission is paid : Consignee is debited with the amount of cash sales only.Credit sales are debited to consignment Debtors Account.On collectionof debts,Consignment Debtors Account is credited against consignee (if collected by him)or against cash (ifdirectly collected).Bad debts in respect of consignment debtors will be written off against consignment account.
(b) When del credere commission is paid : Both cash and credit sales are debited to consignee for he is responsible for the entire amount.No consignment Debtors Account need be opened.Loss arising from bad debts will be borne by the consignee himself.Consignor will not pass any entry for such loss.
2. In the books of consignee :-
(a) When no del credere commission is paid : Only cash sale are credited to consignor.No double entry records need be maintained for credit sales and bad debts.Simply memorandum records will be kept for these for furnishing periodical returns to the consignor.On collection of debts by the consignee,consignor will be credited against cash.
(b) When del credere commission is paid : A Consignment Debtors Account will be opened.All sales (cash and credit) will be credited to consignor against cash (for cash sales) and against Consignment Debtors (for credit sales).On collection of debts, Consignment Debtors will be credited against cash.Bad debts will be written off against Del Credere Commission Account .
3. Unsold Stock On Consignment At Balancing Date : If the consignor’s final accounts are to be prepared while there are yet consigned goods unsold, he must ascertain the profit or loss on that part of the consignment which has been sold.This is done by ascertaining the value of unsold stock and making an adjustment for the same in the consignment Account.
Unsold stock is usually valued at cost to the consignor,including a proper proportion of such expenses incurred either by the consignor or by the consignee, which usually increase the value of goods. All expenses incurred in transferring goods from the godown of in the consignor to that of the consignee increase the value of goods. Such expenses include freight,custom duty,dock charges, insurance in transit,loadingand unloading charges etc.
If,however,there is a reason to believe that the unsold goods will realise less than cost,the unsold portion is valued at the net realisable value,after taking into account estimated expenses yet to be met,including consignee’s commission.
The value of unsold stock,calculated as above, is recorded almost in the same way as Stock on Hand,i.e.,by a journal entry debiting Stock on Consignment Account and crediting the Consignment Account.Stock on consignment Account appears in the Balance Sheet as an asset.At the commencement of the succeeding accounting period,the stock on Consignment Account is closed by transfer to the Consignment Account.As an alternative to the opening of a separate Stock on Consignment Account,the value of stock on consignment may be brought down on the Consignment Account.After the stock is adjusted by using either of the techniques mentioned above, the balance left in the Consignment Account is the profit or loss to date.
4. On 1st January,1990.Govinda of Ghosepara sends 300 chests of raremedicines to Sankar of Simla on consignment basis.The cost of each chest was Rs1,000 only.Govinda incurred the following expenses on the consignment : Rs 750 on railway freight and Rs 450 on insurance.Sankar spends Rs 1,200 on various accounts when the chests reached simla.200 chest were sold by Sankar uniformly at Rs2,000 per chest.Out of these, 10 chests were sold to a party on credit and this transaction ultimate proved bad.Besides another party deducted Rs 300 because of a dispute regarding quality.
Sankar sent an account sales on 30th june, 1990 which revealed that he charged 5% as ordinary commission and 10% as del credere commission. The consignee sent a sight draft for Rs90,000.
You are required to give in the Ghosepara books :
(1) Consignment to simla A/C ; (II) Sankar’s Personal A/C: and (iii) Goods sent on Consignment A/C.
5. Loss Of Goods On Consignment : A part of the goods sent on consignment may be lost or destroyed or damaged either in transit or in the consignee’s godown.Such loss may be due to abnormal causes or normal causes.
Abnormal Loss :- Some losses arise accidentally or out of negligence,e.g.,fire,riot,flood,theft etc.These losses are abnormal and they do not occur often. In order to judge the profitability of the consignment business properly,abnormallosses should be charged to the Profit & Loss Account and not to the Consignment Account.The valuation of loss is done on the same basis as the valuation of stock on consignment.Special care should be taken to allocate expenses incurred prior to loss and after the loss.Abnormal Loss Account is debited and the Profit & Loss Account is credited with the valueof loss.Any amount recovered from Insurance Company is debited to Insurance Claim Account and credited to Abnormal Loss Account,Alternatively,Insurance Claim Account and profit & Loss Accountcanbe directly debited against Consignment Account without opening and Abnormal Loss Account.
Normal Loss -: In certain cases,some loss is unavoidable,inherent and due to natural causes,such as evaporation,leakage,drying etc. Such loss is known as normal loss.Noeffort either by the consignor or by the consignee canprevent this loss.Normal loss forms part of the cost of trade and hence no separate adjustment is required for such loss.While calculating the value of stock on consignment,cost is inflated to cover the normalloss.This is done by appropriating the cost on the basis of actual quantity available for sale.The formula is –
Value of stock on Consignment
= Cost of goods consignee x quantity of unsold stock
Actual quantity available for sale
6. Re : Valuation of abnormal loss and unsold stock
Goods sent on consignment 1,000 kg @ Rs. 10 per kg. Expenses paid by the consignor : Freight Rs.500 and Insurance Rs.300. 200 kg. Were destroyed in transit duw to an accident.Claim admitted by the Insurance Company was Rs.1,500. Theconsignee sold 700 kg.@ Rs.20 per kg. and incurred the following expenses:Unloading Rs 200, Godown Rent Rs.500 and selling Expenses Rs 300.
Pass journal entries relating toloss in transit and unsold consignment stock in thebooks of the consignor.
7. On 1st july 1991, Sengupta of Calcutta sent 150 cases of goods at a cost of Rs.750 per case to Kapoor of Bombay on consignment basis and paid Rs.1,900 for insurance premium, Rs.3,500 for freight and Rs.2,600 for dock charges. On arrival of the goods, Kapoor sent a bank draft for Rs.10,000 to Sengupta on 30th july,1991 and paid Rs.2,500 for clearingcharges, Rs.870 for cartage and Rs.750 for godown rent. 5 cases were damaged in transit and sum of Rs 3,500 was realise by way of compensation from the Insurance Company.Upto 31st December,1991,100 cases were sold for Rs.1,05,000 incurring a bad debt of Rs.1,150.Kapoor was entitled to a commission of 5% of the gross sales with further 2% as del crederecommission.The amount due to senguptaupto 31stDecember,1991 wasremittedbya bank draft.
Show(a) consignmenttoBombay A/C,(b) Kapoor A/C,(c) Loss inTransit A/c and (d) consignment stock A/c in the books of Sengupta.
8. Bijoy, whose accounting year ends on 31st may,1992,consigned 100 bags of sugar,eachbagcosting Rs.300. to Amarof Bombay on 1st April,1992. He had paid Rs.500 towards freight and Insurance. 15 bags were damage in transit and on 6th April,1992 the consignor had received Rs.1,000 on account of the damaged bags from the Insurance Company.
Amar took delivery of the goods on 10th April,1992 and immediately accepted a bill drawn on him for Rs.20,000 for 60 days. On 31st May,1992 the consignee reported that –
(i) 70 bags were sold at Rs.350 per bag;
(ii) The damagedbagswere soldat Rs.110 per bag ; and
(iii) Hehad incurred the following expenses:
Rs.
Godown rent 700
Clearing charges 1,000
Carriage outwards 300
Heis entitled to a commission at 10% on the sale proceeds of all goods expecting damage goods.
Assuming that Amar remits the balance by bank draft on 31st May, 1992,show consignment A/c and Consignee’s A/c in the books of Bijoy.
Deficiencey Of Stock :
