CONSIGNMENT ACCOUNTING TREATMENT

The transactions relating to each consignment are recorded in such a way that the profit or loss of each consignment can be worked out separately. For this purpose, the consignor prepares a Consignment Account relating to each consignment to which all concerned expenses including the cost of goods consigned are debited and the sales proceeds and the closing stock are credited. In addition, he also maintain a consignee’s account in order to compute the amount due from him. 



The consignee, on the other hand, simply maintains consignor’s account in his books to which he debits the amounts remitted to the consignor the expenses incurred by him in relation to the consignment and the commission due to him. Consignor’s Account is credited mainly by the amount of sale proceeds. Now let us study how various transactions related to consignment are recorded in the books of the consignor and the consignee.

In The Books of the Consignor

You know each transaction is recorded first in a subsidiary book and then posted to the respective accounts in the ledger. All transactions related to consignment therefore, are first recorded in the Journal. The entries passed in respect of various transaction are as follows:

 

Goods despatched to the consignee

As you know the consignment of goods cannot be treated as a sale of goods. Therefore, Sales Account will not be credited. In its place, an account called ‘Goods Sent on Consignment Account will be credited and the Consignment Account is debited with the cost of the goods consigned’.

Thus the journal entry will be as follows:

 

Consignment A/c                            Dr.

         To Goods Sent on Consignment A/c

(Being the value of the consignment)

 

If consignments have been sent to more than one consignee, the consignment accounts may be distinguished by adding the names of the places to the Consignment Account. (For example Consignment to Calcutta Account, Consignment to Gonda Account, etc.)

 

Expenses incurred by the consignor

All expenses incurred by the consignor on consignment of goods are debited to the Consignment Account and are thus added to cost of goods consigned. The entry would be:

 

Consignment A/c                            Dr.

           To Cash/Bank A/c

(Being the expenses incurred on the consignment)

 

Advance made by the consignee

The amount of advance received from the consignee cannot be treated as sale proceeds, and so should not be credited to the Consignment Account. It is treated as follows.

 

Cash/Bank/Bills Receivable A/c   Dr.

          To Consignee’s A/c

(Being an advance from the consignee)

 

Bill received from the consignee discounted with the bank

If the consignor gets the bills receivable discounted from his bankers, the entry will be:

 

Bank A/c                                        Dr.

Discount A/c                                  Dr.

To Bills Receivable A/c

(Being bill discounted with the bank)

 

Receipt of account sales from the consignee

When the goods are sold out, the consignee will send an Account Sales to the consignor intimating him the total sales and the amount of his expenses and commission. The following three entries will be recorded in this connection.

 

a)      For sales made by the consignee:

 

Consignee’s A/c Dr.

To Consignment A/c

(Being gross proceeds of sales)

 

b) For consignee’s expenses:

 

Consignment A/c                 Dr.

To Consignee’s A/c

(Being expenses incurred by the consignee in dealing with consignment)

 

c) For consignee’s commission:

Consignment A/c                 Dr.

      To Consignee’s A/c

(Being commission payable on sale proceeds)

 

Goods returned by the consignee

Sometimes defective or obsolete goods are returned by the consignee to the consignor. When such goods are received, the journal entry will be :

 

Goods Sent on Consignment A/c             Dr.

To Consignment A/c

(Being goods returned by the consignee)

 

Bad debts incurred

When the consignee is entitled to Del Credere commission, no entry for bad debts is to be passed as such loss is to be borne by the consignee himself. But when Del Credere commission is not paid, the loss on account of bad debts is to be borne by the consignor, the entry will be:

 

Consignment A/c                            Dr.

                  To Consignee’s A/c

(Being value of bad debts)

 

Remittance by the consignee in full settlement

The balance amount will have to be remitted by the consignee to the consignor on settlement of the account. The following entry will be recorded, when the consignee remits to the consignor:

 

Cash/Bank/Bills Receivable A/c                             Dr.

            To Consignee’s A/c

(Being balance due from the consignee received).

 

Profit or loss on consignment

When you balance the Consignment Account, it  reveals profit or loss. If the total of credit side is more than the total of debit side, it is a profit and if the total of debit side is more than that of the credit side, it is a loss. The  profit or loss is transferred to the Profit & Loss Account and thus the Consignment  Account is closed. The following entries will be recorded:

a) If there is a profit:

 

Consignment A/c                                             Dr.

To Profit & Loss A/c

(Being profit on consignment)

 

b) If there is loss:

 

Profit & Loss A/c                                           Dr.

To Consignment A/c

(Being loss on consignment)

 

Closing entry for goods sent on consignment

Goods Sent on Consignment Account  is closed by transfer to the Trading Account. The entry passed is as follows:

 

Goods Sent on Consignment A/c                          Dr.

To Trading A/c

(Being goods sent on consignment account closed)

Unsold stock with the consignee

It is quite possible that all the goods sent on consignment are not sold by the consignee up to the date on which final accounts are prepared. Some goods may remain unsold known as the ‘Consignment Stock’. This should be properly valued and credited to the Consignment Account. However, the entry for consignment stock will be:

 

Consignment Stock A/c                                          Dr.

To Consignment A/c

(Being unsold goods with the consignee)

 

You have learnt how to record consignment transactions in the Journal of the consignor. Now let us see how these accounts are shown in the ledger and how profit or loss on consignment is worked out. The consignor usually maintains the following three accounts:

 

1. Consignment Account

It is prepared by the consignor showing all transactions relating to a particular consignment. The objective of this account is to ascertain net profit/loss aising from each consignment. Once goods are consigned by the consignor, its cost is debited to the Consignment Account along with various expenses incurred by the consignor and the consignee in dealing with that particular consignment. The commission due to the consignee is also debited to the Consignment Account. When Del Credre Commission is not paid, the bad debts, if any, are also to be debited to this account.

Once the goods reach the consignee, some of these will be unsold and the rest sold either on cash or on credit.  irrespective of the type of sale, the entire sale proceeds will be shown on the credit side of the Consignment Account.  The unsold goods are treated as consignment stock and credited to this Account. If some goods are found unsuitable for sale, the consignee will send them back to the consignor and the same will appear on its credit side.  After all these items are recorded, the Consignment Account is balanced.

The difference between the debit and credit totals of Consignment Account is regarded as profit or loss which is transferred to the Profit and Loss Account and the Consignment Account stands closed. It is in fact a nominal account and is just like a Trading and Profit and Loss Account about which you have studied earlier in final accounts. Therefore, the principles applied to Trading and Profit & Loss Account hold good for this account also. Like Trading and Profit & Loss Account, all expenses and purchases are debited to this account and all sales and incomes are credited.

2. Goods Sent on Consignment Account

This is a real account. It deals with the goods transferred from the consignor to the consignee and goods returned by the consignee to the consignor. All the goods consigned by the consignor will be credited to this account and the goods returned by the consignee are debited to this account. The balance represents the cost of goods with consignee for sale, and is transferred to the Trading Account.

 

3. Consignee’s Account

It is a personal account of the consignee. It is prepared for ascertaining the amount due from the consignee. The consignee’s account is debited with all cash and credit sales effected by the consignee. The various expenses incurred by the consignee, the commission charged by him as well as the advance remitted by him are credited to this account. This account usually shows a debit balance indicating the amount due from the consignee. At time it may show credit balance, if the advance given by the consignee is more than the sale affected by him. The balance revealed by this account is shown in the balance sheet of the consignor, debit balance on the assets side, and credit balance on the liabilities side, unless the account is settled by the required remittance.

 

In The Books of the Consignee

The Consignee mainly prepares a consignor’s account in his books to find out what is finally due to the consignor. He records all transactions relating to the consignment first in the Journal and then posts them to the relevant accounts (including Consignor’s Account) in the ledger. The journal entries passed by the consignee are:

 

1. Receipt of goods from the consignor: No entry is passed by the consignee when he receives goods from the consignor because receipt of goods on consignment does not amount to purchases of goods by him. He keeps them in his godown on behalf of the consignor for which he usually maintains an Inwards Consignment Book.

 

2. Expenses incurred by the consignor: No entry is passed by the consignee.

 

3. Advance made by the consignee

Consignor’s A/c Dr.

To Bank/Bills Payable A/c

(Being advance made by the consignee)

 

4. Bill discounted by the consignor with the bank: No entry is passed by consignee.

 

5. Sale of goods by the consignee

 

Cash A/c (cash sales)                                  Dr.

Consignment Debtors A/c (Credit sales)    Dr.

To Consignor’s A/c

(Being goods sold)

 

6. Expenses incurred by the Consignee: Being an agent of the consignor, all legitimate expenses incurred by the consignee related to the consignment are to be reimbursed by the consignor, the entry will be:

 

Consignor’s A/c Dr.

To Cash/Bank A/c

(Being expenses incurred on consignment)

 

7. Commission due to the consignee: This should include all types of commissions due to the consignee: The entry will be

 

Consignor’s A/c Dr.

To Commission A/c

(Being commission due on sales)

 

8. Return of goods to the consignor: No entry will be passed in the books of the  consignee as no entry was passed at the time of receipt of the goods.

 

9. Payment received from debtors

 

Cash/Bank A/c                                             Dr.

To Consignment Debtors A/c

(Being amount collected from debtors)

 

10. Bad debts incurred

a)    If consignee does not get Del Credere  commission, all bad debts have to be borne by  the consignor himself. The entry will be.

 

Consignor’s A/c Dr.

To Consignment Debtors A/c

(Being bad debts on consignment)

 

b)    If Del Credere  commission is paid to the consignee, the bad debts are to be borne by him. The entry will be:

 

Bad Debts A/c                                     Dr.

To Consignment Debtors A/c

(Being bad debts incurred on consignment)

 

11.   When the bills payable accepted in favour of consignor is met on the due date:

 

Bills Payable A/c                                          Dr.

To Bank A/c

(Being bills payable honoured)

 

12. Remittance in final settlement

Consignor’s A/c Dr.

To Cash/Bank Account

To Bills Receivable Account

(Being payment of the balance due to the consignor)

 

13. Unsold stock in possession of the consignee :  No entry will be passed for unsold goods in the books of consignee as no entry was passed when he received goods from the consignor.

 

14.  Profit or Loss on consignment: No entry is passed for profit or loss on consignment as the consignee is not concerned with it. The Consignee also prepares ledger accounts after passing all the journal entries.

The  Consignor’s Account and Commission Account are the two important accounts prepared by the Consignee in his books. Of course, he will also do the postings to the other accounts such as Consignment Debtor’s Account, Consignment Expenses Account and Bills Payable Account. etc. But these are of less importance, hence not discussed here.

 

1. Consignor’s Personal Account: This is the main account in Consignee’s ledger which is prepared for working out the amount due to the consignor. Whatever amount he receives from sales of goods is credited to this account. All expenses incurred by the consignee in relation to consignment, the commission due to him, and the advance given by him to the consignor will be debited to this account. Further, if the consignee does not get Del Credere commission, the bad debts on account of credit sales are also debited to the Consignor’s Account. The balance of this account indicates the amount payable to the consignor. This account is just the opposite of the Consignee’s Account in the books of the consignor.

 

2 Commission Account: This is nominal account. It shows the income earned by the consignee for the services rendered by him, All types of commission whether, ordinary or special, due to the consignee is credited to this account. The Commission Account will be debited with bad debts if the consignee is to bear such loss because of Del Credere  commission.

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