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Consignment Accounting Journal Entries Definition and Explanation of Consignment: Learning Objectives: 1. Define and explain the terms consignment, consignor and consignee. The word consignment can be generally defined as the act of sending a quantity of goods by the manufacturers and producers of one country or place to their agents in another at the risk of the principals for the purpose of sale. Goods so sent are known as "consignment". The sender of the goods is called the consignor. Generally the manufacturers or producers are consignors. The person to whom goods are forwarded for the purpose of sale is known as the consignee. The consignment can beclassified as: 1. Outward consignment. 2. Inward consignment. It is called "outward" when the dispatch of a quantity of goods from one country to another is made for the purpose of sale and is called "inward" when the receipt of the quantity of goods is made for the purpose of sale. Goods sent on consignment do not become the property of the consignee. He has not bought them. The ownership remains with the sender or the consigner. If the goods are destroyed, the receiver (consignee) is not responsible. The loss will fall on the consignor. The consignee tries to sell the goods according to the instructions of the consignor. When the goods have been sold, he will deduct his expenses, commission, etc., from the sale proceeds and the balance is remitted to the consignor. The relationship between the consignor and the consignee is that of principle and agent. The consignee is the agent. The consignee acts entirely on behalf of the consignor. The consignee is entitled to his remuneration which is generally fixed on the basis of a commission of sales. The expenses incurred by the consignee must also be reimbursed by the principal. It is important to remember that the consignee does not buy the goods; he merely receives the possession of the goods. Distinction/Difference Between Consignment and Sale: Learning Objectives: 1. What is the distinction/difference between consignment and sale? The following are the main points of the difference between consignment and sale. Transfer of Legal Ownership of the Goods: In case of sale, the legal ownership of the goods sold is transferred to the purchaser of goods. Whereas in case of a consignment of goods , the legal ownership of the goods is not transferred to the consignment but the ownership of the goods remains vested in the consignor till the goods consigned are sold by the consignee. Relationship Between Consignor and Consignee: In case of a sale of goods, the relationship between the seller and the purchaser of the goods is that of a creditor and a debtor whereas in case of a consignment the relationship between the consignor and the consignee is that of a principal and agent. because the consignee is to sell goods on behalf of the consignor. Expenses Incurred: In consignment, expenses incurred by the consignee in connection with the goods consigned to him are usually borne by the consignor whereas in case of a sale, expenses incurred after sale of goods are born by the purchaser. Risk Attached to the Goods: In case of consignment, risk attached to the goods sold lies with the consignor till the goods consigned are sold by the consignee. But in case of a sale, risk attached to the goods sold is transferred to the buyer of goods. Return of Goods: In case of consignment, return of goods is possible if the goods are not sold by the consignee. But in case of sale, return of goods is not possible as goods once sold are not returnable. Requirement of Account Sale: In case of consignment, account sale is required to be submitted periodically by the consignee to the consignor. But in case of sales no account sale is required to be submitted by the purchaser to the seller. Definitions of Important Terms Used in Consignment Accounting: Learning Objectives: 1. Define the most important terms used in consignment account. Commission: The term commission as used in connection with consignment denotes the remuneration of the consignee for selling the goods of the consignor. This commission is generally calculated at a rate percentage on the gross proceeds of the sales. Del Credere Commission: The del credere commission is an extra commission allowed to the consignee on his guaranteeing the realization of the debts in full, in connection with the credit sale of goods on consignment. Goods may be sold by the consignee either for cash or on credit. When they are sold on credit, the consignee may guarantee that they will be duly paid for and that he will be liable to indemnify the consignor for all bad debts. In such cases; the consignor pays the consignee an extra commission for this guarantee. The extra commission is called del credere commission. Advance Against Consignment: Usually the consignee is asked to accept a bill of exchange to cover part of the value of goods. This is a guarantee by the consignee that when sales are effected, he will make the necessary payment. Of course, instead of a bill of exchange, the agent may remit a sum of money to the principle as an advance. This advance or the amount of the bill of exchange will be adjusted when the goods are sold. Consignment Account: The consignment account is one which shows what profit or loss is made out of the dealing of the goods sent on consignment. It is the combination of the trading and profit and loss account of any particular consignment. Pro forma Invoice: When the consignor sends the goods to the consignee, he forwards a statement showing the particulars such as quantity, quality, price of goods etc. This statement is called the Pro forma invoice. But in case of regular sale, an invoice is prepared and sent along with the goods. It implies that a sale has taken place. Account Sale: An account sale is a statement prepared and sent by the consignee to the consignor at periodical intervals, dealing there in the goods sold, price realized, expenses incurred, commission payable to and the net amount due from the consignee. The following is a specimen form: [Format/Example of Account Sale] Account sales of 75 cases of fancy goods received from and sold on account and risk of Messers A & Co. $ $ 35 case of fancy goods at $150 per case 5,250 40 cases of fancy goods at $200 per case 8,000 13,250 Less Charges and Expenses: Freight & Cartage 50 Brokerage 10 Insurance 150 Storage 200 Commission at 10 percent of sales 1,325 1,735 11,515 Less Amount of our acceptance given in advance 10,000 Bank draft now enclosed 1,515 E. & O. E. Signed: New York, 26 December. 2009 A & Co. Consignment Accounting Journal Entries: Learning Objectives: 1. Make journal entries in the books of consignor and that of consignee. As the goods sent on consignment by the consigner are not his sales, he must not record consignment as sales and the consignee must must not record them as purchases. The consigner should not take up any profit on the transaction until the goods have been actually sold by the consignee. Since the goods still belong to the consignor, any unsold goods in the hands of the consignee at the end of the trading period should be included in the consignor's stock. The recording of the consignment transactions in the books of the consignor and consignee will be made in the following manner: Accounting Entries in the Books of Consignor: (1) On dispatch of goods:- Consignment account (With the cost of goods) To Goods sent on consignment account (2) On payment of expenses on dispatch:- Consignment account (With the amount spent as expenses) To Bank account (3) On receiving advance: Cash or bills receivable account (With the amount cash or bill) To Consignee's personal account (4) On the consignee reporting sale (as per A/S):- Consignee's personal account (With gross proceeds of sales) To Consignment account (5) For expenses incurred by the consignee (as per A/S):- Consignment account (With the amount of expenses) To Consignee's personal account (6) For commission payable to the consignee:- Consignment account (With the amount of To Consignee's personal account expenses) Assuming that all the goods sent have been sold, the consignment account will show at this stage the actual profit or loss made on it. The same is transferred to profit and loss account. The entry in case of profit is: Consignment account To profit and loss account In case of loss the entry is: Profit and loss account To Consignment account Note: The goods sent on consignment account may be closed by a transfer to trading account. When Consignment is Partly Sold: When all the goods sent on consignment have not been sold., the value of unsold goods in the hands of the consignee must be ascertained and the profit or loss should be found out by taking this stock into account. The entry is: Stock on consignment account To Consignment account Stock on consignment account is an asset and will be shown in the balance sheet of the consignor. Valuation of stock is discussed on valuation of stock page. Accounting Entries in the Books of Consignee: (1) When consignment goods are received:- No entry is made in the books of account. The consignee is not the owner of the goods and therefore he makes no entry when he receives the goods. (2) For expenses incurred by the consignee:- Consignor's personal account To Cash account (3) When advance is given:- Consignor's personal account To Cash or bills payable account (4) When goods are sold:- Cash or bank account To Consignor's personal account (5) For commission due:- Consignor's personal account To commission account The consignor's account will be closed by debiting it with cash or final bill or draft in settlement.
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