Chapter- 2 Consignment Accounts

CONSIGNMENT, CONSIGNOR AND CONSIGNEE

At times, goods are sent by a dealer to an agent for sale for commission, on the basis that the
goods will be sold on behalf of and at the risk of the dealer. The despatch of goods is known as
consignment; the person who sends the goods is known as the consignor; and the agent who
receives the goods is known as the consignee. If 'X' sends goods to 'Y' for sale, 'X' is known as
consignor and 'Y' the consignee. The consignor is the principal' and the consignee is the 'agent'.

FEATURES OF CONSIGNMENT

1. Goods are sent by the consignor to the consignee with an objective of sale at a profit.

2. The Consignee acts as an agent of the consignor, i.e. the relationship between the
"Consignor" and the "Consignee" is that of "Principal and Agent". The transactions between
them are governed by the agreement made between them as well as by the provisions of "The
Law of Agency".

3. Goods remain the property of the consignor and are to be sold at his risk entirely. The
ownership and thereby risk in the total stock is with the Consignor. The consignee does not buy
the goods; he merely agrees to sell them on behalf of the consignor.

4. The consignor does not sell the goods to the consignee. Therefore, the consignor cannot ask
the consignee to pay the price of the goods unless they are sold and the sale proceeds are
actually realised.

5. The consignee agrees to sell the goods for an agreed rate of commission and is allowed to
deduct his commission due from the sale proceeds.

6. The consignee is responsible to pay to the consignor the amounts realised on sale of goods.

7. All expenses incurred by the consignee for receiving and selling the goods are recovered by
the consignee from the consignor.

8. Any stock remaining unsold with the consignee belongs to the consignor.

9. The profit or loss on sale of goods sent on consignment belongs to the consignor.
DISTINCTION BETWEEN CONSIGNMENT AND SALE

NO. CONSIGNMENT SALE

Consignment occurs between a Sale occurs between a seller and a
1. consignor and a consignee. buyer.
The consignee is an agent of the The buyer deals with seller as
2. consignor who is principal. principal to principal.
Consignor sends a pro-forma invoice Seller sends a regular invoice to the
3. to the consignee. buyer.
Ownership of goods remains with Ownership of goods is transferred to
4. the consignor. buyer.
Consignee obtains goods for earning Buyer obtains goods for own use or
5. commission. resale.
Consignee is liable to pay to Buyer is liable to pay to seller price
6. consignor only price of goods of all goods received.
Sold; not of all goods received.
Profit or loss on sale belongs to the Profit or loss on further sale belongs
7. consignor. to the buyer.
Risk of loss/damage is borne by Risk of loss/damage is borne by
8. consignor. buyer.
Consignee can return the unsold Buyer cannot return unsold goods to
9. goods to the consignor. the seller.
10. Consignor can recover goods Seller cannot recover goods from
10. from the consignee for non-payment. buyer for non-payment.

PRO-FORMA INVOICE

Meaning: Since the goods sent on consignment cannot be treated as sales, the consignor does
not prepare a proper invoice. He simply prepares a Pro-forma (Rough) Invoice and sends it to
the consignee, along with the goods despatched. Pro-forma Invoice informs the consignee about
price of goods, expenses incurred, mode of transportation and the minimum sale price at which
the goods are to be sold.

NORMAL COMMISSION

The consignee is remunerated by way of commission. This is normally calculated at an agreed

percentage of the gross amount of sales.

DEL CREDERE COMMISSION

Since the consignee sells the goods as an agent of the consignor, it is the consignor who
normally runs the risk of bad debts arising from credit sales. However, the consignor is not in
direct contact of the ultimate buyers, and hence may wish to have a guarantee from the
consignee that they will pay. A consignee often gives such a guarantee of realizations of debts
arising out of credit sales. He gives such guarantee against additional commission known as
del credere commission

ADVANCE

Normally, the consignor gets some advance from the consignee as a security for the goods
despatched to him. It may be in the form of cash or bank draft or a bill of exchange drawn by
the consignor and accepted by the consignee. The advance received from the consignee should
not be credited to consignment account as it is not a part of the sale proceeds.

COST OR NRV, WHICHEVER IS LOWER

The unsold stock lying with the consignee as at year-end is valued and recorded by the
consignor in his books at cost or market value whichever is less. The cost includes cost of goods
sent plus proportionate direct expenses incurred (by the consignor and the consignee) till the
goods reach the consignee's godown e.g. freight, octroi, clearing charges, transit insurance,
loading and unloading etc. The Market Value or Net Realisable Value means the value for
which the goods can be sold in the market. If the goods are sent at Invoice Price, commission
payable to the consignee needs to be deducted from the Invoice Price of the stock in order to
calculate its Net Realizable Value (NRV). If the NRV is lower than the cost, closing stock is
valued at its NRV.

EXPENSES INCLUDED IN COST

1. Following expenses are included in value of closing stock -

A. Consignor's Expenses
• Carriage
• Freight
• Insurance
• Packing

B. Consignee's Direct/Non-recurring Expenses

• Carriage up-to godown
• Freight up-to godown
• Customs Duty
• Octroi
• Clearing Charges
• Dock dues
• Unloading Charges at godown
2. Following expenses are not included in value of closing stock-

• Godown Rent
• Warehouse Charges
• Discount
• Bad Debts
• Insurance of the goods in the godown
• Office and Administration Expenses
• Selling and Distribution Expenses

FORMULA
Stock = Cost of goods sent x Quantity in Stock
Quantity Sent

ENTRY

The following entry is passed to record the closing stock in Books of Consignor
Stock on Consignment A/c Dr.
To Consignment A/c
No Entry is passed in the Books of the Consignee.

GOODS IN TRANSIT

Goods in transit means goods have been dispatched by the consignor but have not reached the
consignee and are in transit at the end of accounting period. Such goods are similar to
consignment stock and are valued at cost of goods to consignor plus proportionate expense
incurred by the consignor for sending goods such as packing, loading, carriage, freight, transit,
insurance, etc.
S.No. In the Books of Consignor In the Books of Consignee
Goods in Transit Adjustment
Goods in Transit A/c Dr. No Entry
To Consignment A/c

Problem 2 :

Nilesh sent 100 bicycles to Manish on consignment at ₹ 500 each. He paid ₹ 2,000 for freight
and carriage. Manish paid ₹ 1500 for customs and carriage. Nilesh received an account sales for
80 bicycles sold by Manish at ₹ 620. Manish has also paid ₹ 2,600 for advertisement and salary
of the salesman. Manish is entitled to commission @ 15%. Find out the value of closing stock if
the market price is ₹ 620 per bicycle.
 ACCOUNTING IN BOOKS OF CONSIGNOR AND CONSIGNEE

JOURNAL ENTRIES

No JOURNAL OF CONSIGNOR JOURNAL OF CONSIGNEE

Particulars Dr. Cr. Particulars Dr. Cr.
₹ ₹ ₹ ₹
Goods consigned
1. Consignment A/c Dr. No Entry
To Goods sent on
Consignment A/c
Consignor's Expenses
2. Consignment A/c Dr. No Entry
To Cash / Bank A/c
Consignee's Advance (Cash)
3. Cash/Bank A/c Dr. Consignor's A/c Dr.
To Consignee's A/c To Cash/ Bank A/c
Consignee's Advance (BR)
4. Bills Receivable A/c Dr. Consignor's A/c Dr.
To Consignee's A/c To Bills Payable A/c
Cash Sales by Consignee
5. Consignee A/c Dr. Cash A/c Dr.
To Consignment A/c To Consignor's A/c
Credit Sales by Consignee
6. Consignee A/c Dr. Consignment Debtors A/c Dr.
To Consignment A/c To Consignor's A/c
Good Returned by Consignee
7. Goods sent on
Consignment A/c Dr. No Entry
To Consignment A/c
Expenses by Consignee for Returning
8. Good
Consignment A/c Dr. Consignor's A/c Dr.
To Consignee A/c To Cash A/c
Goods Taken by Consignee
9. Consignee A/c Dr. Purchase A/c Dr.
To Consignment A/c To Consignor's A/c
Collection from debtors by Consignee Cash/ Bank A/c Dr.
10. No Entry To Consignment Debtors A/c
Consignee's Expenses
11. Consignment A/c Dr. Consignor's A/c Dr.
To Consignee's A/c To Cash/ Bank A/c
Consignee's Commission
12. Consignment A/c Dr. Consignor's A/c Dr.
To Consignee's A/c To Commission A/c
Consignee's Del Credere Commission
13. Consignment A/c Dr. Consignor's A/c Dr.
To Consignee's A/c To Del Credere
Commission A/c
 Bad Debts (No Del Credere)
14. Consignment A/c Dr. Consignor's A/c Dr.
To Consignee A/c To Consignment Debtors A/c
15. Bad Debts (Del Credere) Del Credere Commission A/c Dr.
No Entry To Consignment Debtors A/c

16. Consignee's Remittance (Cash) Consignor's A/c Dr.

Cash / Bank A/c Dr. To Cash/ Bank A/c
To Consignee's A/c

17. Consignee's Remittance (BR) Consignor's A/c Dr.

Bills Receivable A/c Dr. To Bills Payable A/c
To Consignee's A/c
BR Discounted
18. Bank Dr. No Entry
Consignment A/c (Discount) Dr.
To Bills Receivable A/c

19. Closing Stock No Entry

Stock on Consignment A/c Dr.
To Consignment A/c

20. Profit on Consignment No Entry

Consignment A/c Dr.
To Profit & Loss A/c

21. Loss on Consignment No Entry

Profit & Loss A/c Dr.
To Consignment A/c
Transfer Goods sent to Trading A/c
22. Goods sent on consignment A/c Dr. No Entry
To Trading A/c

23. Loading on Goods sent No Entry

Goods on Consignment A/c Dr.
To Consignment A/c

24. Loading on Closing Stock No Entry

Consignment A/c Dr.
To Stock Reserve
Practical Problem : 1

Ram & Co. of Calcutta consigned 50 cases of goods at ₹ 200 each to Nathan of Mumbai. The
consignor pays ₹ 200 for insurance and for freight ₹ 300. Nathan sent an account sales showing
the gross proceeds at ₹ 24,000. The expenses paid by Nathan were dock dues ₹ 20, carriage ₹
50, warehousing expenses ₹ 130. He sent the amount due to the consignor after deducting 4 per
cent commission

Give journal Entries in the books of both the parties.

Practical Problem : 2

Ramdas & Company of Mumbai consigned 50 bundles of cutpiece cloth @ ₹ 700 each to
Mukherjee & Co. of Kolkata to be sold on commission basis. An advance of ₹ 16,000 was
received from Mukherjee & Co. Mukherjee & Co. sent an account sale which states that total
goods were sold for ₹ 56,000 and ₹ 1,800 were paid for carriage, godown rent and port
expenses. Their commission was ₹ 2,000. They sent a bank draft for the balance amount to
Ramdas & Co.

From the above particulars necessary journal entries in the books of Ramdas & Co. and also
show Ledger Accounts in the books of the consignor and consignee.

Practical Problem : 3

Neil of Latur consigned on 1st January, 2015, 800 Hard disk costing, ₹ 1,500 per piece to Denis
of Barshi. Freight charges incurred on the consignment were ₹ 25,500. On 1st January, 2015,
Neil drew a bill on Denis for ₹ 4,50,000 payable on 31st March, 2015 which was duly accepted
by Denis. The bill was discounted by Neil with his bankers on the same day at 12% p.a.
discount to be treated as consignment expenses Denis rendered account to Neil on 31st March,
2015 showing cash sales of 300 Hard disk at ₹ 1,700 per Hard disks and credit sales of 500
Hard disks at ₹ 1,800 per Hard disk. He incurred selling expenses of ₹ 44,080 Denis was
entitled to a commission of 10% and additional 2% as Del Credere commission. On 31st March,
2015, Denis remitted to Neil the amount due to him.

You are required to prepare Consignment Account and Denis's Account in the books of Neil
and Neil's Account in the books of Denis.

Practical Problem : 4 (Bad Debts - No Del Credere Commission)

On 1st November, 2013, C of Calcutta sends goods costing ₹ 1,00,000 to D of Delhi on

consignment basis. C paid ₹ 5,000 as railway freight and ₹ 2,000 as insurance.
On 31st December, 2013, an Account Sales was received from D disclosing that the entire
quantity of goods were sold for ₹ 1,50,000 out of which, ₹ 30,000 was sold on credit. A
customer who purchased goods for ₹ 5,000 failed to pay and the debt proved bad. All other
debts were collected by D in Full. As per agreement, D is allowed a commission @ 10% on
sales. D sends the amount due to C by a cheque.

Prepare necessary Ledger accounts in the books of C and D.

Practical Problem : 5 (Bad Debts - With Del Credere Commission)

The Kolkata Motors Ltd. consigned to their agent in Patna two motor cars costing ₹ 48,000 each
for sale. Commission was payable ordinary 8% and del-credere commission 2%. The agent was
to bear all expenses in Patna which amounted to ₹ 6,500. The agent sold one car for ₹ 65,000
and remitted ₹ 52,000 on account. The second car was sold for ₹ 71,500 but out of this a sum of
₹ 13,000 became bad debt.

Open the necessary accounts in the books of both consignor and consignee.

Practical Problem : 6 On 15 January, 2013 Jamshed & Co. of Mumbai sent to Mukherjee Co.
of Kolkata 400 bicycles at an invoice price of ₹ 100 per bicycle to be sold on commission.
Freight and insurance were ₹ 600. Account sale was received from consignee as follows:

15th March -100 bicycles were sold @ ₹ 145 on which 5% Commission and ₹ 375 for expenses
were deducted.

10th April - 150 bicycles were sold @ 140 on which 5% Commission and ₹ 290 for expenses
were deducted.

From the above information prepare Consignment a/c in the books of Jamshed & Co. and close
it on 30th April, 2013 keeping in mind that no sales were made afterwards. Also show accounts
in the books of Mukherjee & Co.

Practical Problem : 7 (Discount on BR)

M/s. Diamond Cements Ltd., Narsinghgarh consigned to M/s Somani Bros. of Bhopal, 5,000
Cement bags costing ₹ 80 per bag. M/s Diamond Cements Ltd. paid ₹ 4,500 for railway freight,
₹ 2,500 for insurance and ₹ 2,200 for sundry expenses.

On receipt of consignment M/s Somani Bros. accepted a Bill for ₹ 2,00,000 which was
discounted by the consignors at the bank for ₹ 1,99,500 and discount was charged to
consignment account. M/s Somani Bros. sent an Account Sales which shows as :

(1) Cash sales of 4,000 bags @ ₹ 95 each.

(2) Expenses paid by Somani Bros. were : (i) Godown Rent ₹ 2,000; (ii) Selling Expenses ₹
6,000.

(3) Somani Bros. remitted the balance due by Bank Draft after deducting their expenses and
commission at 2% on gross sales.

Show Consignment Account and Consignee's Account in the books of Consignor and the
Consignor's Account in the books of the Consignee.

Practical Problem : 8
Fridge King consigned to Vijay Sales on 1st June, 2013, 100 refrigerators costing ₹
8,900 per refrigerator. Freight charges incurred on the consignment were ₹ 5,000.
Vijay Sales paid ₹ 12,000 for unloading and ₹ 3,000 for godown rent. Vijay Sales
rendered account to Fridge King on 31st August, 2013 showing sales of 70
refrigerators for ₹ 7,25,100 and Selling expenses of ₹ 22,500; and 10 refrigerators
for ₹ 1,25,200 net after incurring expenses of ₹ 24,000. Vijay Sales's commission
was 10%. On this date Vijay Sales remitted to Fridge King the amount due to them.
You are required to prepare Consignment Account and Vijay Sales's Account in the
books of Fridge King.
Practical Problem : 9 (Bad Debts Exceeding Del Credere Commission)
Karanth sold goods on behalf of Vijay Sales on consignment basis. On January 1,
2013, he had with. him a stock of ₹ 20,000 on consignment.
Karanth had instruction to sell the goods at cost plus 25% and was entitled to a
commission of 4% on sales, in addition to 1% del credere commission on total sales
for guaranteeing collection of all the sales proceeds.
During the year ended 31st December, 2013, cash sales were ₹ 1,20,000, credit
sales ₹ 1,05,000 and Karanth's expenses relating to the consignment ₹ 3,000 being
salaries and insurance. Bad debts were ₹ 3,000 and goods sent on consignment ₹
2,00,000.
From the above, prepare Consignment Account and Consignee's Account in the
books of Vijay Sales and important Ledger accounts in the books of Karnath.
Practical Problem : 10
Arun of Meerut consigned 100 sewing machines to Sanjay of Ranchi to be sold on
his risk. The cost of one sewing machine was ₹ 150, but the invoice price was ₹
200. Arun paid freight ₹ 600 and insurance in transit ₹ 200.
Sanjay sent a bank draft to Arun for ₹ 10,000 as advance payment and later sent an
Account Sales showing that 80 sewing machines were sold at ₹ 220 each. Expenses
incurred by Sanjay were : carriage inward ₹ 25, Octroi ₹ 75, godown rent ₹ 500 and
advertisement ₹ 300. Sanjay is entitled to a commission of 5% on sales.
Journalise the above transactions in the books of Arun and Sanjay.