CONSIGNMENT & JOINT VENTURE
Meaning and Features of Consignment
Consignment is a process under which the owner consigns/handovers his materials to his agent/salesman for the purpose of shipping, transfer, sale etc. Following are the points that throw more light on the nature and scope of a consignment − Here, ultimate ownership of the goods remains with the manufacturer or whole seller who handovers goods to his agent for sale on commission basis. Consignment is merely a transfer of possession of goods not an ownership. Since ownership of goods remain with the manufacturer (consignor), consignee (agent) is not responsible for any loss or destruction of goods. The goods are sold on owner’s risk and hence, profit/loss goes to owner. Consignee only gets re-imbursement of expenses incurred by him and commission on sale made by him, because sale that proceeds, belongs to owner (consignor).
Why is Consignment not a Sale?
Following are the reasons that explain why consignment is not a sale −
Ownership − Ownership of goods need to be transferred from seller to buyer in case of sale, but ownership of goods remains with the consignor, till the goods are sold by the consignee. Risk − In case of a consignment, normally, risk remains with the consignor in the event of goods being lost or destroyed. Relationship − The relation between a seller and a buyer will be of debtor and creditor in case where goods are sold on credit basis. On the other hand, the relationship between a consignor and a consignee is that of principal and agent. Goods Return − Usually, the sold goods cannot be returned back; however, if there is any manufacturing defect or any other technical fault, seller is obliged to take them back. On the other hand, consignee may return the unsold stock of goods to consignor anytime.
Important Terms
Pro-forma Invoice
Invoice implies that the sale has taken place, but pro-forma invoice is not an invoice. Proforma invoice is a statement prepared by the consignor of goods showing quantity, quality, and price of the goods. Such pro-forma invoice is issued by the consignor to consignee regarding the goods before the sale actually takes place.
Account Sale
Statement showing the details of goods received, goods sold, expenses incurred, commission charged, remittances made, and due balance is called Account Sale and it is remitted by the consignee to the consignor of goods on a periodic basis. Commission
There are three types of commission payable to consignee on sale of the goods −
Simple Commission − This is usually a fixed percentage on the total sale, calculated as per mutually agreed terms. Over-riding Commission − In case of an extra-ordinary sale of the goods, some specific amount is payable to consignee in the form of an incentive is called overriding commission. Over-riding commission is also calculated on the total sales. Del-credere Commission − “An agreement by which an agent or factor, in consideration of an additional premium or commission (called a del credere commission), engages, when he sells goods on credit, to insure, warrant, or guarantee to his principal the solvency of the purchaser, the engagement of the factor being to pay the debt himself if it is not punctually discharged by the buyer when it becomes due.” C. & G. Merriam Co. A del credere commission is paid by the consignor to his agent for taking additional risk of recovery of debts from the consignee on an account of credit sales made by him (agent) on consignor's behalf.
Direct Expenses
Expenses, which increases the cost of the goods and are of non-recurring nature and incurred till the goods reach the warehouse of consignee may called direct expenses.
Indirect Expenses
Warehouse rent, storage charges, advertisement expenses, salaries, etc. comes under the category of the indirect expenses. The distinctions between direct and indirect expenses are important especially at the time of valuation of the unsold closing stock.
Advance
Amount paid in advance by a consignee to consigner as security called as advance.
Valuation of unsold Consignment
Valuation of unsold stock will be done like a closing stock of a Trading concern and should be valued at the cost or the market price whichever is low. This stock will be valued at −
Proportionate cost price and Proportionate direct expenses. Here, proportionate direct expenses mean — all expenses incurred by the consignor and the expenses of consignee, which are incurred by him till the goods reach the warehouse.
Invoicing Goods higher than Cost Under this method, goods are charged at the cost + profit and the pro-forma invoice also shows this higher price of such goods. To know the actual profit, at the end of an accounting period, consignment account will be credited with excess price so charged. Value of the stock will also be adjusted to the extent of profit element. Main reason to adopt this policy by consignor is − To hide actual profit from consignee. Valuation of a stock at the consignor’s warehouse is comparatively easy in this case. In this case, consignor usually directs consignee to sale goods on invoice price only. It prevents different sale price to different customers.
Loss of Goods
There may be two types of losses as explained below − Normal Loss − Normal loss may occur due to inherent characteristics of goods like evaporation, drying up of goods, etc. It is not separately shown in the consignment account, but included in the cost of goods sold and the closing stock by inflating the rate per unit. To calculate the value of unsold stock, following formula is used. Valueofclosingstock=TotalvalueofgoodssentNetquantityreceivedbyconsignee×UnsoldquantityValueofclosi ngstock=TotalvalueofgoodssentNetquantityreceivedbyconsignee×Unsoldquantity Netquantityreceived=Goodsconsignedquantity−NormallossquantityNetquantityreceived=Goodsconsignedqu antity−Normallossquantity Abnormal Loss − An abnormal loss may occur due to any accidental reason. It is credited to the consignment account to calculate actual profitability. Valuation of closing stock is done on the same basis as explained earlier i.e. proportionate cost + proportionate direct expenses.
Abnormal Loss and Insurance
If, there is an insurance policy in respect of the consigned goods; following entries will be passed in the books of a consignor −
Sr.No. In the Books of Consignor In the Books of Consignee
1 Payment of Insurance Premium Consignment A/cDr (a) If insurance premium is paid by the To Cash A/c consignor, then cash will be credited. Or (b) If Insurance premium is paid by the consignee, then consignee’s A/c will be To Consignee A/c credited. (Being Insurance premium paid)
2 Abnormal Loss A/cDr At the time of Abnormal Loss To Consignment A/c (Being Loss Incurred) 3 Insurance Company (Name of the insurer) A/cDr Acceptance of Claim by Insurance Company To Abnormal Loss A/c (Being claim admitted)
4 Bank A/cDr On receipt of Claim To Insurance Company A/c (Being amount of claim received)
5 Profit & Loss A/cDr In Case of Loss To Abnormal Loss A/c (Being amount of Abnormal Loss transferred)
Summary of Accounting Entries
Following Accounting Entries (Except for Loss) will be done in the books of consignor and consignee for transactions related to the consignment −
Sr.No. In the Books of Consignor In the Books of Consignee
1 When goods are sent to the consignee Consignment A/cDr No need to do any Entry in this case To Goods Sent on Consignment A/c (Being Goods Sent on Consignment)
2 Expenses Incurred by Consignor Consignment A/cDr Not Applicable To Cash/Bank A/c (Being Expenses incurred on consignment)
3 Advance given by consignee Consigner A/cDr Cash/Bank A/cDr To Bank/Cash A/c To Consignee’s A/c (Being Advance amount paid to Consignor) (Being advance received from consignee)
4 Expenses Incurred by Consignee Consigner A/cDr Consignment A/cDr To Bank/Cash A/c To Consignee’s A/c (Being Expenses incurred on goods (Being Expenses incurred by consignee) received on consignment) 5 Sale by Consignee Cash (for cash sale) A/cDr Consignee’s A/cDr Debtors (for Credit Sale) A/c Dr To Consignment A/c To Consignor A/c (Being Expenses incurred by consignee) (Being goods sold)
6 Commission to Consignee Consigner A/cDr Consignment A/cDr To Commission A/c To Consignee’s A/c (Being Commission earned) (Being Commission on sale due to consignee)
7 Remittance from Consignee Consigner A/cDr Cash/Bank A/cDr To Bank/Cash A/c To Consignee’s A/c (Being Balance due Payment made to (Being due amount received from consignee) consignor)
8 Entry for Profit on Consignment Profit & Loss A/cDr Not Applicable To Consignment A/c (Being Profit earned on consignment)
9 Loss on Consignment Consignment A/cDr To Profit & Loss A/c Not Applicable (Being Loss incurred on Consignment transferred to the profit & Loss Account)
Note − The goods sent on consignment account will be closed by transferring balance into the Purchase account or the Trading account.
Joint Venture Major Features and Characteristics of Joint Venture
Following are the major features of a joint venture − There is an agreement between two or more persons. Joint venture is made for the specific execution of a business plan/project. It is a temporary partnership without the use of a firm name. Agreement for joint ventures is automatically dissolved as soon as specific project is over. Profit & Share are shared on the same terms and conditions agreed upon. However, in the absence of any agreement, profit & share will be divided equally. Partnership and Joint Venture
There are following differences between partnership and joint venture − Partnership always carried on with firm’s name, but for the joint venture, no such firm’s name is required. The persons who run the business on partnership are called as partners and the persons who agreed to take the project as joint venture are called as co-venturers. Normally, a partnership is constituted for a long period (including various projects), whereas joint venture is formed to complete a specific job/project. Partnership is governed under the Partnership Act, 1932, whereas there is no enactment of such kind for the joint ventures. However, as a matter of fact in law, a joint venture is treated as a partnership. There is no limit specified for the numbers of co-venturers, but the number of partners is limited to 10 under banking business and 20 for any other trade or business. Liability of a partner is unlimited and may extent of his business and personal estate, whereas under joint venture, liabilities of co-venturers are limited to the particular assignment or project agreed upon. Joint Venture and Consignment
Major differences between joint venture and consignment may be summarized as − Relationship − The co-venturers of a Joint venture are the owners of a Joint venture, whereas relationship of a consignor and consignee is of owner and Agent. Sharing of Profits − There is no distribution of profit between a consignor and consignee, consignee only gets commission on sale made by him. On the other hand, the co-venturers of a joint venture share profits as per the agreed profit sharing ratio. Ownership of Goods − Ownership of the goods remains with the consignor. Consignor transfers only possession to the consignee, but every co-venturer of a joint venture is the co-owner of the goods/project. Contribution of Funds − Investment is done by the consignor only. On the other hand, funds are contributed by all co-ventures in a certain agreed proportion. Continuity of Business − In case of a joint venture, there is no continuity of the business once project is completed. On the other hand, if, everything goes smooth, consignment is a continuous process. Accounting Records
To keep a record of the joint venture transactions, there are three following types of accounting methods −
When one of the Venturers keeps Accounts, When Separate Books of Accounts are kept for the Joint Venture, and When Separate Books of Accounts are not kept for the Joint Venture. Let’s discuss each of them separately − When one of the Venturers keeps Accounts
If one of the co-venturers is appointed to manage the joint venture, he is awarded an extra commission or remuneration out of the profit for his services.
Journal Entries
When share of investment received from other co- Cash/Bank A/cDr venturers To Co-venturers A/c
Joint Venture A/cDr To Cash A/c (in case of cash purchase) When goods are purchased Or To Creditors A/c (for credit purchase)
Joint Venture A/cDr When expenses incurred To Cash A/c
Cash A/cDr Or When goods are sold Debtors A/cDr To Joint Venture A/c
Joint Venture A/cDr When commission allowed to working co-venturer To Commission A/c
In case of Profit balance of joint venture, account Joint Venture A/cDr will be transferred to profit & Loss (own share of working co-venturer) and other co-venture’s To Profit & Loss A/c personal accounts To Co-venturers personal A/c
Profit & Loss A/cDr In case of Loss To Joint Venture A/c All Co-venturer A/cDr On settlement of accounts To Cash/Bank A/c
When Separate Books of Accounts are kept for the Joint Venture
Under this method, all co-venturers contribute their share of investment and deposit their shares in a Joint Bank account — newly opened for the specific purpose of the Joint Venture. They may use this bank account to make any kind of payments and to deposit sale proceeds or any other kind of receipts. In addition to Bank account, a Joint venture account is also opened in the books to keep records of all transactions routed through this account. This category of accounts is a personal account of the each co-venturer. Thus following three accounts are opened −
Joint Bank Account Joint Venture Account Personal account of co-venturers
When Separate Books of Accounts are not kept for the Joint Venture
It is of two types −
When all venturers keep separate accounts Memorandum joint venture method When all Venturers keep Separate Accounts − Separate Joint venture account and personal accounts of other co-venturers are opened under this method of accounting. Joint venture account is debited and bank account or creditor account is credited on the account of goods purchased or expensed. Joint venture account is credited and a bank account or debtor account is debited in case of either cash sale or credit sale. Each co-venturer debits joint venture account and credits personal accounts of other co- venturer on the account of either goods purchased or expensed by other co-venturers. Joint venture account is credited and personal account of others co-venturer account is debited in case of sale made by other co-venturers. Joint venture account is debited and commission account is credited if, commission is receivable, but if commission is receivable by other co-venturer, then the concerned co- venturer account will be credited instead of the commission account. If unsold stock is taken, then goods account will be debited by crediting Joint venture account. On the other hand, if unsold stock is taken by any other co-venturer, then personal account of the co-venturer will be debited. Balance in the joint venture accounts represents profit or loss and later that amount of profit or loss will be transferred to the personal accounts of co-venturers. Note − Above transactions are possible only when all the co-venturers exchange information’s on regular basis. Memorandum Joint Venture Method Important features of memorandum method are given as hereunder − Only one personal account is opened by each co-venturer in his book named Joint Venture account with…………… (Name of other co-venturer). Same process will be followed by other co-venturer in his books of accounts. Only one personal account will be opened by each co-venturer irrespective of the fact, how many other co-venturers are exists. For example, there is a joint venture of 4 person A,B,C, & D; now, A in his books will open only one personal account named as Joint venture with B,C, & D account. Each party will record only those transactions in his book, which are done by him; the transactions done by other co-venturers will be ignored. In addition to above said personal account, a combined account named as “memorandum joint venture account” will also be opened. Memorandum account is merely a combined account of personal accounts opened by each co-venturer. Debit side of personal account will be transferred to the memorandum account and the credit side of personal account will be transferred to the credit side of memorandum account. Transactions done by co-venturers among themselves including cash received or paid by one co-venturer to other will be ignored at the time of preparation of a memorandum account. Balance of memorandum joint venture account will represent profit or loss of the particular business. Further, the profit or loss will be transferred to the individual co- venturer account in their profit sharing ratio.