Consignment Account -
The System Of Consignment Sale

System of consignment sale refers to the dispatch of goods by principal to his agent to be sold by the latter (agent) on behalf of the former (principal).    Here it is to be noted that under consignment, the ownership of the goods does not get transferred but remains with the principal. The principal sending the goods is called "Consignor" and the agent to whom the goods are sent is called "Consignee".

Under consignment, the agent sells the goods on behalf of the consignee and remits the sale proceeds to the consignor after deducting all expenses incurred and commission entitled.

Unless otherwise agreed upon, the expenses of consignment are borne by the consignor.

Del credere Commission:

In case of credit sale of goods, chances of Bad Debts prevail. When goods are sold by the consignee on ordinary commission, all expenses including Bad Debts are to be borne by the Consignor.

Del credere commission is the amount of extra commission given by the consignor to the consignee in case of credit sale of goods. This makes the Consignee responsible for any kind of bad debts that may arise due to credit sale of goods. This commission is payable on total sales, the agent will not be responsible for any kind of bad debts.

Points To Remember:

  1. The goods are not sold to the Consignee.
  2. The ownership of the goods remains with the Consignor even after sending to Consignee.
  3. The Consignor sends the goods in a Proforma invoice.
  4. The Amount of Sales belongs to Consignor.
  5. All the expenses of consignment are to be borne by Consignor.
  6. If the expenses are paid by the consignee, it is to be recovered from consignor.
  7. The Consignee entitled to Commission and also del credere commission if he is responsible for bad debts (if any incurred).
  8. Consignee periodically sends to the Consignor a statement called Account Sales.
Accounting in the Books on Consignor:

When goods are dispatched from Consignor to Consignee, it is just a transfer of location of the goods while the ownership of the goods remains with the Consignor and as such it cannot be treated as sales; so Sales A/c cannot be credited. Likewise, until the goods are sold, consignee cannot be considered as a debtor and Consignee's A/c cannot be debited. It is because of these two reasons that-

  1. Consignment A/c and
  2. Goods Sent of Consignment A/c are opened.

Thus, under Consignment Accounts, when goods are consigned/dispatched, Consignment A/c is debited and Goods Sent on Consignment A/c is credited.

Consignment A/c is a special kind of Trading A/c and is debited with all the expense and costs of the consignment and is credited with the sales proceeds. The balance of the consignment represents either profit or loss and is transferred to Profit and Loss A/c.

The balance of the Goods Sent on Consignment A/c is transferred to the Purchases A/c or Trading A/c in order to adjust the cost of goods sold.

The following Items are normally debited to Consignment A/c:

  1. Cost of goods sent on consignment
  2. Expenses incurred by the consignor;
  3. Expenses incurred by the Consignee
  4. Consignee's Commission
  5. Bad debts when Del credere Commission is not paid, and
  6. Profit on Consignment.

The following items are credited to the consignment account:

  1. Sales proceeds,
  2. Returns of goods by consignee,
  3. Abnormal loss of goods,
  4. Unsold stock with the consignee; and
  5. Loss on consignment (if any)

Accounting Treatment In The Books Of The Consignor And Consignee:

Journal Entries In The Books Of the Consignor:

1. For Cost of Goods Consigned:

Consignment A/c-------------Dr. (With the amount of goods sent on consignment)

       To Goods Sent on Consignment A/c

(Being the value of goods consigned)

2. For Expenses Paid By The Consignor:

Consignment A/c------------Dr. (With the amount of expenses paid by the consignor)

       To Bank A/c

(Being expenses on consignment met by the consignor)

3. For Any Advance Received From The Consignee:

Bills Receivable/Bank A/c------------Dr.(With the amount of advance received from the consignee)

       To Consignee A/c

(Being advance received from the consignee)

4. For Discounting of Bill With The Bank:

Consignment A/c----------Dr.(With the amount bank charge charged by he bank for discounting of bill)

       To Discount On Bills A/c

(Being the bills discounted with the bank)

5.For Sale of Goods By the Consignee:

Consignee A/c--------------Dr.(With the value of goods sold by the consignee)

       To Consignment A/c

(Being the amount of goods sold by the consignee)

6. For Expenses Incurred By The Consignee:

Consignment A/c-------------Dr.(With the amount of expenses paid by the consignee)

       To Consignee A/c

(Being the amount of expenses incurred by the consignee)

7. For Commission Payable To The Consignee:

Consignment A/c-------------Dr.(With the amount of commission payable to the consignee)

       To Consignee A/c

(Being the amount of commission payable to the consignee)

8. (a)For Profit On Consignment:

Consignment A/c--------------Dr.(With the amount of profit earned on consignment)

       To Profit & Loss A/c

(Being the amount of profit earned transferred to Profit & Loss A/c)

(b)For Loss On Consignment:

Profit & Loss A/c------------Dr.(With the amount of loss suffered on consignment)

       To Consignment A/c

(Being the amount of loss suffered transferred to Profit & Loss A/c)

9. For Amount Received From The Consignee In Final Settlement:

Bank A/c----------------Dr.(With the amount received from the consignee as final settlement)

       To Consignee A/c

(Being the amount received from the consignee as final settlement.)

10. For Closing Of Goods Sent on Consignment A/c:

Goods Sent On Consignment A/c------Dr. (With the value of stock lying unsold)

       To Purchase/Trading A/c

(Being the amount of goods sent on consignment transferred to Trading A/c)

Points To Be Noted:
  1. Basically what we find is that the goods are sold by the Consignee on behalf of the Consignor
  2. The ownership of the goods remains with the consignor
  3. All the expenses are borne by the consignor
  4. Consignment A/c is treated as Nominal A/c. All expenses are debited to the Consignment A/c as because the expenses are incurred in the normal course of the

    consignment business.

  5. The Consignee after selling the goods remit the amount of sale to the consignor after deducting any expenses made by the consignee and the amount of advance (if any) paid to the consignor
  6. If Del credere commission is provided for; bad debts (if any) will be borne by the consignee as because, for the consignor del credere commission allowed is treated as a guarantee for the recovery of debts by the consignee
  7. Finally, the amount of goods sent on consignment is closed by transferring it to the trading A/c. (Compulsory Entry)

Journal Entries In the Books Of The Consignee:

1. For Expenses Incurred By The Consignee On Consignment:

Consignor A/c----------------------Dr. (With the amount of expenses incurred receivable from the consignor)

       To Bank A/c

(Being the expenses incurred by the consignee borne by the consignor)

2. For Any Advance Sent To The Consignor:

Consignor A/c----------------------Dr. (With the amount of advance paid to be adjusted on final settlement)

       To Bank/Bills Payable A/c

(Being the amount of advance sent to the consignor)

3. For Sale Of Goods:

Bank A/c----------------------Dr. (With the amount of sales made on consignment)

       To Consignor A/c

(Being the amount of goods sold on consignment)

4. For Commission Receivable:

Consignor A/c----------------------Dr. (With the commission receivable from the consignor)

       To Commission A/c

(Being the amount of commission receivable from the consignor)

5. For Final Remittance To The Consignor:

Consignor A/c----------------------Dr. (With the amount money paid to the consignor on final settlement)

       To Bank/Bills Payable A/c

(Being the amount of sales remitted to the consignor)

Valuation of Unsold Stock On Consignment:

Stock on Consignment A/c----------------------Dr. (With the value of stock on consignment lying unsold)

       To Consignment A/c

(Being the value of stock lying unsold)

Note:

The value of unsold stock is to be valued at cost price or market price which ever is lower.

Accouting Treatment For Abnormal Loss in Consignment: 1. On OCcurance of Abnormal Loss:

Abnormal Loss A/c----------------------Dr.(With the amount of abnormal loss suffered on consignment)

       To Consignment A/c

(Being the value of abnormal loss suffered.)

2. When The Value Of Loss Is Considered By The Insurance Company:

Insurance Company A/c----------------------Dr. (With the amount of claim)

Profit & Loss A/c----------------------Dr. (with the amount of loss not covered)

       To Abnormal Loss A/c

(Being the value of loss covered by insurance.)

3. When The Amount Of Insurance Claim Is Received:

Bank A/c----------------------Dr. (With the amount of claim received)

       To Insurance Company A/c

(Being claim amount received from Insurance Company against the value of abnormal loss covered by insurance.)

Accounting Treatment For Loading On Consignment When Goods Are Consigned At Invoice Price:

1. On Opening Balance Of Stock On Consignment:

Stock Reserve A/c----------------------Dr.

(With the amount of loading removed on opening stock)

       To Consignment A/c

(Being loading on opening balance of stock on consignment removed.)

2. On Goods Sent On Consignment Stock:

Goods Sent On Consignment A/c----Dr. (With the amount of loading removed from goods sent on consignment)

       To Consignment A/c

(Being loading on opening balance of stock removed.)

3. On Goods Retured By The Consignee:

Consignment A/c----------------------Dr. (With the amount of loading removed from goods returned by Consignee)

       To Goods Sent On Consignment A/c

(Being loading on stock returned by consignee removed.)

4. On Closing Stock On Consignment:

Consignment A/c----------------------Dr. (With the amount of loading removed from closing stock)

       To Stock Reserve A/c

(Being loading on closing balance of stock removed.)