Consignment
Consignment is a type of business arrangement where one person who is an owner e.g manufacturer, trader, distributor sends goods to another person for sale on his behalf in consideration of commission. The person who sends the goods is called the "consignor" and the person who sells the goods on behalf of the consignor is called the " consignee". Ownership remains with the consignor until the goods are sold out.
Features
Following features are found in consignment:
- Two parties ie. consignor and consignee
- Transfer of possession of goods i.e from the consignor to consignee
- Ownership remains with the consignee
- Agreement between consignor and consignee
- Reconciliation between consignor and consignee of dealings between them
- Both consignor and consignee do separate accounting
Terms used in Consignment Accounting:
Consignor: The person who sends goods for sale.
Consignee: The person who receives the goods is called the consignee.
Consignment: A business arrangement in which a person sends his goods to another person for sale in consideration of commission.
Consignment Agreement: A legally written commission between consignor and consignee, which defines the terms of consignment.
Pro-Forma Invoice: The statement sent by the consignor to the consignee along with the goods is called a Pro-forma invoice. The detail of goods e.g price, goods, etc is shown in this statement.
Non-recurring expenses: Expenses incurred by the consignor to despatch the goods to the consignee e.g packaging, carriage, etc are called non-recurring expenses. These expenses are added to the cost of the goods sent on consignment.
Recurring Expenses: The expenses incurred by the consignee after the goods reached his place are called recurring expenses e.g store expenses, etc.
Commission (normal): It is a reward/ consideration given by the consignor to the consignee for the sale of the goods as per the agreement of the consignment.
Overriding Commission: It is an extra commission granted by the consignor to the consignee to work hard to push a new line of products in the market.
Delcredere Commission: The commission given by the consignor to the consignee to bear any loss from bad debts is called delcredere commission. If any nonrecovery is not in the nature of the bad debt, then such loss will be borne by the consignor even if he pays the delcredere commission.
Account Sales: it is the statement sent by the consignee to the consignor showing the following detail:
- Goods sold
- Amount received
- Expenses incurred
- Commission charged
- Advance payment
- Stock in Hand
- Balance Due
Consignment Inward: When goods are despatched, it is consignment inward from viewpoint of the consignee.
Consignment Outward: When goods are despatched, it is consignment outward from viewpoint of the consignor.
Principal and Agent: The relationship between consignor and consignee is that of principal and agent i.e consignor being the principal and consignee being the agent.
Consignment Inward Book: The book maintained by the consignee is called the consignment inward book.
Consignment Outward Book: The book maintained by the consignor is called the consignment outward book.
Expenses borne by Consignee: If it is in agreement that any expenses mentioned in the agreement are to be borne by the consignee or if any loss occurs due to the negligence of the consignee, such expenses will not be debited in the consignment account by the consignor.
Discount on Bill Receivable discounted by Consignor: This item may be treated in the following manners:
1) If a discount on bill receivable is considered as consignment expenses, it will be debited to the consignment account.
2) If a discount on bill receivable is considered as "financial charges", it will be debited to the Profit & Loss account.
Goods invoiced at a price above cost: If goods are shown in proforma invoice at price above cost, an adjustment will be made in the consignment account for the excess of invoice price over cost for "Goods sent on Consignment" and " Consignment Stock".
Abnormal Loss of Stock: Loss due to theft, fire, accident, etc should be treated in such a way that consignment profit is not affected.
Normal Loss of Stock: In case of normal loss e.g. normal leakage, etc, inflates the value of the closing stock.
Valuation of Closing Stock with Consignee: For valuation of closing stock with consignee all the expenses which are incurred up to the point the goods are placed in the consignee's godown are added to the value of the stock i.e non-recurring expenses.
Entries in the books of Consignor:
Entries in the books of Consignee:
For unloading in "Goods sent on Consignment" and " Consignment Stock"
If there is wording of % of cost, then following formula will be used:
If there is wording of % of invoice / selling price, then following formula will be used:
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