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Consignment

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15

ONSIGNMENT

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INTRODUCTIONS




To consign means to send.
In Accounting, the term “consignment account” relates to accounts dealing with a situation

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where one person (or firm) sends goods to another person (or firm) on the basis that the
goods will be sold on behalf of and at the risk of the former.

Did you find this document useful? TO CONSIGNMENT

PARTIES
Consignor (Principal) Consignee (Agent)
The party who sends the goods The party to whom goods are sent

 The relation between consignor and consignee is same as the relation of a principal and an
agent. The consignor is principal, whereas consignee is an agent.
 The ownership of the goods, i.e., the property in the goods, remains with the consignor or
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the principal
 The agent or the consignee does not become their owner even though goods are in his
possession. On sale, of course, the buyer will become the owner.

PROFORMA INVOICE
 The consignor does not send an invoice to the consignee.
 He sends only a Performa Invoice. The object of the Performa invoice is only to convey
information to the consignee regarding particulars of the goods sent.

EXPENSES
 At the time of dispatching goods consignor pays various expenses e.g. labour, freight,
carriage outward, transportation expenses, packaging and insurance are debited to
consignment account.
 After receiving delivery of goods, consignee pays octroi and all such expenses which
requires for maintaining goods (on behalf of consignor) are also debited to consignment
account and credited to consignee’s account .

CONSIGNMENT

Usually, the consignee recovers from the consignor all expenses incurred by him on the
consignment. This however can be changed by agreement between the two parties.
(ii) It is also usual for the consignee to give an advance to the consignor in the form of cash
or a bill of exchange. It is adjusted against the sale proceeds of the goods.
(iii) For his work, the consignee receives a commission calculated on the basis of gross sale.
For ordinary commission the consignee is not responsible for any bad debt that may arise.
If the agent is to be made responsible for bad debts, he is to be paid a commission called
del-credere commission. It is calculated on total sales, not merely on credit sales until and
unless agreed.
(iv) Periodically, the consignees ends to the consignor a statement called Account Sales. It sets
out the sales made by the consignee, the expenses incurred on behalf of the consignor, the
commission earned by the consignee and the balance due to the consignor.
(v) Firms usually like to ascertain the profit or loss on each consignment or consignments to each
consignee.

Consignment Account relates to accounts dealing with such business where one person
sends goods to another person on the basis that such goods will be sold on behalf of and
at the risk of the former.

Normal Loss
 Normal loss Is an Unavoidable loss due to inherent feature of the goods
(For ex.: evaporation normal leakage/spoilage)
 It is treated as a part of cost by inflating the cost per units.
 No journal entry is passed to account such loss.

Treatment of Normal Loss

Total cost of goods sent/total quantity available after normal loss.

Class Example :
1000 kg apples are consigned to wholesaler for Rs.2 per kg+ expenses 500.
Normal loss 10%,closing stock 50 units. Calculate the amount of closing stock.
Solution:
Particulars Units Rs.
Cost of goods sent 1000 2000
Expenses 500
Less :Normal loss(10% of 100
1000 units)
Cost per units =2000+500/1000-100=2.78

CONSIGNMENT

Closing stock = Units * Cost per units=50*2.78=139.

Abnormal Loss
 Abnormal loss is an avoidable loss which occurs due tom abnormal factors like fire, theft
abnormal spoilage /breakage/pilferage etc and not due to inherent nature of goods.
 It is not treated as a part of cost.

Case 1- Calculation of abnormal loss during goods in transit

Cost of goods sent + consignor’s proportionate expenses
Proportionate expenses= Consignor’s expenses * Units Lost /Total Units.

Case 2- Calculation of Abnormal Loss in Consignee’s Godown

Cost Price of Goods Lost in Consignee’s Godown
ADD: Consignor’s Proportionate Expenses
ADD: Consignee’s Proportionate Non-Recurring Expenses.
Proportionate Non-Recurring Expenses=
Consignee’s Total Non-Recurring exp * Units Lost / Total units received by Consignee

Journal Entries

Abnormal loss Abnormal Loss Account Dr.

To Consignment Account
If abnormal loss is recoverable from Insurance Company’s Account Dr.
the insurance company To Abnormal Loss Account
If abnormal loss is recoverable from Consignee’s Personal Account Dr.
the consignee To Abnormal Loss Account
If abnormal loss is not recoverable, Abnormal Loss Account is transferred to Profit &
Loss Account.

Distinctions between normal and abnormal loss

Normal loss Abnormal loss
Normal loss occurs due to inherent nature of Abnormal loss occurs mainly because of
the goods being shipped e.g. leakage, unforeseen events e.g. accident or natural
evaporation, loss of perishable goods etc. calamity etc.
Normal loss is not accounted for Abnormal loss is accounted for immediately
immediately and is loaded on the remaining in profit and loss account.
goods. It gets accounted for as cost of
remaining goods as and when they are sold.
As normal loss is added to cost of remaining Abnormal loss does not impact gross profit.
goods, it impact gross profit. Insurance is generally available for abnormal
Insurance companies generally do not losses.

CONSIGNMENT

cover normal loss as it is expected to be

incurred on each consignment or storage of
goods.
Normal loss is almost certain however it may Abnormal loss is because of unforeseen events
vary from time to time. and is not certain.

Commission
 Commission is the remuneration paid by the consignor to the consignee for the services
rendered to the former for selling the consigned goods.
 Three types of commission can be provided by the consignor to the consignee, as per the
agreement, either simultaneously or in isolation.
 Ordinary Commission
 Del-credere Commission

 Over-riding Commission

 Ordinary Commission
 It is based on fixed percentage of the gross sales proceeds made by the consignee.
 It is given by the consignor regardless of whether the consignee is making credit sales
or not.
 This type of commission does not give any protection to the consignor from bad debts
and is provided on total sales.

 Del-credere Commission
 To increase the sale and to encourage the consignee to make credit sales, the consignor
provides an additional commission generally known as del-credere commission.
 This additional commission when provided to the consignee gives a protection to the
consignor against bad debts. In other words, after providing the del-credere commission,
bad debts is no more the loss of the consignor.
 It is calculated on total sales unless there is any agreement between the consignor and
the consignee to provide it on credit sales only.

 Over-riding Commission
 It is an extra commission allowed by the consignor to the consignee to promote sales
at higher price then specified or to encourage the consignee to put hard work in
introducing new product in the market.
 Depending on the agreement it is calculated on total sales or on the difference
between actual sales and sales at invoice price or any specified price.

CONSIGNMENT

 In order to encourage the consignee to earn higher margins, it can also be in the form
of share of additional profits made by consignee on sale of goods.

Return Of Goods From The Consignee

Reasons:
 Poor Quality
 Destroyed in Transit

Valuation:
 Consigned goods returned by the consignee to the consignor are valued at the price at
which it was consigned to the consignee.
 Expenses incurred by the consignee to send the goods back to consigner are not taken
into account because only those expenses are considered which help to bring the goods
into present location and condition i.e. saleable condition.

ACCOUNTING FOR CONSIGNMENT TRANSACTIONS AND EVENTS IN THE BOOKS OF

THE CONSIGNOR
For ascertaining profit or loss on any transaction (or series of transactions) there is one golden
rule; open an account for the transaction (or series of transactions) and (i) put down the cost of
goods and other expenses incurred or to be incurred on the debit side; and (ii) enter the sale
proceeds as also the cost of goods remaining unsold on the right hand side or the credit side.
The difference between the total of the two sides will reveal profit or loss. There is profit if the
credit side is more.

The consignor often dispatches goods to various consignees and he would be interested to
ascertain the profit or loss from each consignment separately. Therefore, a separate
consignment account has to be prepared for each consignment. Each consignment account
is a nominal-cum-personal account and constitutes a profit an loss account in respect of
the transactions to which it relates.
1 For goods sent on consignment to consignee
Consignment A/c Dr.
To Goods Sent on Consignment Account

2 For expenses incurred by consignor

Consignment A/c Dr.
To Cash / Bank A/c

CONSIGNMENT

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