Consignment Accounting


A business may appoint agent in various areas (local or abroad) to sell goods on its behalf so as to increase sales and maximise profit. The person/firm who sends the goods is known as the consignor and the one who receives the goods is known as the consignee. Consignment is the dispatch of goods by the consignor (principal) to the consignee (agent).

Goods sent on consignment do not become the property of the consignee. The consignee tries to sell the goods according to the instructions of the consignor. When the goods have been sold, the agent will deduct his expenses from the sales proceed and the balance will be remitted to the consignor.

All expenses of goods, received and sold, are borne by the consignor. If the goods are destroyed/ damaged, the consignee is not responsible for the loss. The consignor is entitled to profit and bears any losses on consignment.

The dispatch of goods by the consignor to the consignee for the purpose of sales is called outward consignment. The receipt of the quantity of goods by the consignee is called inward consignment.

Performa Invoice

When goods are sent on consignment then the consignor usually sends a pro-forma invoice to the consignee. The main objective of this pro-forma invoice is to give information to the consignee regarding the specifications of goods sent. It is different from ordinary invoice as the goods are only sent to the consignee and are still unsold. In pro-forma invoice, many consignors mention a price of the goods sent on consignment higher than cost so that the consignee does not know the true profit of the consignor.

Account Sales

Consignee usually sends a statement to the principal (consignor) on periodical basis. This statement includes the details of sales made by him (consignee), the expenses incurred by him on behalf of his principal, the amount of commission which the consignee has earned and the balance which he still owes to the consignor. This helps the consignor to make entries in his books and to prepare accounts like consignment and consignee account.

Ordinary (Basic) and Del Credere Commission

Commission is simply the remuneration of the consignee for selling goods on behalf of the consignor. It is usually a fixed percentage (%) on gross profit proceed from sales. There are two types of commission:

1. Ordinary/Basic Commission

Consignee is entitled to receive a commission as an agreed fixed percentage on the basis of gross sales of the goods he received on consignment. This is allowed on total sales and does not give any protection to the consignor from bad debts (borne by the consignor). In this situation, the consignee has no obligation to pay back the amount due from credit customers.

2. Del Credere Commission 

When consignee sells the consigned goods on credit basis then there could be a possibility that the amount due from some customers is not received in full. The consignor sells these goods through consignee and has no direct contact with the ultimate customers but faces the risk of bad debts arising due to credit sales. In order to increase sales and to avoid the risk of bad debts arising from credit sales, the consignor may allow an additional commission to the consignee. This is an extra commission to the consignee if he takes the responsibilities of any bad debts. The consignee will have to pay back any amount outstanding from credit customers to the consignor.

Advance against consignment  

This is an amount of money paid in advance by the consignee as a guarantee to cover part of the value of goods sent on consignment.

Consignment Account 

This account is prepared by consignor to determine profit or loss on each consignment on individual basis. Consignment account is similar to income statement. Its debit side shows goods sent on consignment and expenses relating to consignment. Its credit side shows total sales, return of goods by the consignee and inventory. The difference between debit and credit sides of consignment account shows profit or loss on consignment.


In the book of the consignor (principal).

  • Consignment account
  • Goods sent on consignment
  • Consignee account

In the book of the consignee (agent).

  • Consignor account

Accounting entries in the book of consignor:

Journal Entries

1

Dispatch of goods as consignment

DR
CR

Consignment (DR)

***



To Goods sent on consignment


***





2

Expenses incurred/paid by consignor on dispatch



Consignment (DR)

***



To Bank


***





3

Advance against consignment




Bank (DR)

***



To Consignee


***





4

Bank charges incurred by consignor




Consignment (DR)

***



To Bank


***






From details of account sales







5

Reporting sales by consignee




Consignee (DR)

***



 To Consignment


***





6

Expenses incurred by consignee




Consignment (DR)

***



To Consignee


***





7

Bad debts (if borne by consignor)




Consignment (DR)

***



To Consignee


***





8

Commission (ordinary/del credere)




Consignment (DR)

***



To Consignee


***

 

Accounting entries in the book of consignee:

Receipts of goods on consignment (inward consignment) is not recorded in the book of consignor since he is not the owner of the goods.


Journal Entries

DR
CR

1

Expenses incurred by consignor




Consignor (DR)

***



To Bank


***





2

Advance against consignment to consignor




Consignor (DR)

***



To bank


***





3

Receipts from credit customers




Bank (DR)

***



To customers


***





4

Bad debts borne by consignor




Consignor (DR)

***



To customer


***





5

Bad debts borne by consignee




Bad debts (DR)

***



To customer


***





6

Commission Received




Consigner (DR)

***



To sales commission received


***





7

Sale of goods by consignee




Bank/Customer (DR)

***



To consignor


***






Closing Inventory

The inventory in consignment accounting is also valued by using the principle of lower of cost and net realisable value. Cost for inventory valuation includes original costs of the unsold goods plus proportionate amount of the expenses to deliver the goods to the consignee’s place.  The cost of inventory should include all expenditure incurred in bringing the product to its present location and conditions. For Example

  • Transport cost
  • Custom duty
  • Air freight and insurance
  • Landing charges
  • Handling cost
  • Carriage inwards

NOTE:

The following expenses should not be included in cost of inventory:

  • Selling and distribution cost
  • Advertising
  • Warehouse rent
  • Warehouse insurance.

Question 1

Ankir, an exporter, sends goods to Sim her agent. The following information relates to the consignment of goods:


$

Goods sent on Consignment by Ankir

1000

Freight charges by Ankir

120

Sim incurred the following expenses:


Import Duties

235

Other expenses

65

Sales by Sim

2 150

Commission – Sim

10% of Sales

Sim paid amount due to Ankir at the end of the month



Consignment Account

Details

$

Details

$

Goods on consignment

1000

Sales

2150

Bank - Freight Charges

120



Import duties

235



Other expenses

65



Ordinary Commission

215



Profit

515




2150


2150






Goods sent on consignment account

Details

$

Details

$

To income statement 

1000

Consignment

1000






Consignee Account

Details

$

Details

$

Sales

2150

Import duties

235

 

 

Other expenses

65

 

 

Commission

215

 

 

Bank

1635

 

 

 

 

 

2150

 

2150


Question 2

Aisha sends 200 cases of goods costing $60 each on consignment to Kate on 1st May 2014. The following information is available:


Ordinary commission                                    

8% of sales

Del Crederer Commission                             

2% of sales

Freight and Insurance paid by Aisha             

$ 400

Bank charges incurred by Aisha                    

$ 35

Account Sale from sale included the following:


Sales of 150 cases at $100 and 50 cases of $90


Customs duty                                                 

$ 1 000

Storage Costs                                                 

$ 600

Advertising                                                     

$ 200

Selling and Distribution                                 

$ 400

Advance payment against Consignment       

$ 15 350

 

Consignment Account

Details

$

Details

$

Goods sent on consignment

12000

Sales

19500

Ordinary commission

1560

 

 

Del credere commission

390

 

 

Bank-Freight and insurance

400

 

 

 Bank charges

35

 

 

Custom duty

1000

 

 

Storage cost

600

 

 

Selling and distribution cost

400

 

 

Advertising

200

 

 

profit

2915

 

 

 

19500

 

19500


 

Goods sent on consignment

Details

$

Details

$

To income statement

12000

Consignment

12000







Consignee Account

Details

$

Details

$

Sales

19500

Ordinary commission

1560

 

 

Del credere

390

 

 

Custom duty

1000

 

 

Storage cost

600

 

 

Selling and distribution

400

 

 

Advertising

200

 

 

Bank

15350

 

19500

 

19500

 

Question 3

Anil sends goods on consignment to Shaw. The following information is available:

1000 units are dispatched at $25 each.


Expenses incurred by Consignor:

$

Packing                                                           

250

Carriage inwards                                           

350

Freight and Insurance                                                

400

Expenses incurred by Consignee:


Customs duty                                                 

500

Carriage inwards                                           

100

Warehouse rent                                             

200

Warehouse insurance                                    

200

The Consignee sold 800 units at $35 each and made a payment of $27 000.

 

Workings:

Cost                 =          25 000+250+350+400+500+100                         =          26 600

Cost/unit         =          26 600/1 000  = $ 26.6

Consignment account

Details

$

Details

$

Goods on consignment

25000

Sales

28000

Bank -packing

250

Closing inventory   (26.6*200)

5320

Bank-carriage on sales

350



Bank -freight and insurance

400



Consignee -custom duty

500



Consignee-carriage inwards

100



Warehouse rent

200



Warehouse insurance

200



Profit

6320




33320


33320



Goods on consignment 

Details

$

Details

$

To income statement

25000

Consignment

25000

 

 

 

 


 

Consignee account

Details

$

Details

$

Sales

28000

Custom duty

500

 

 

Carriage inwards

100

 

 

Warehouse rent

200

 

 

Warehouse insurance

200

 

 

Bank

27000

 

28000

 

28 000