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ACCOUNTING

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CONSIGNMENT ACCOUNTS
Consignment occurs when goods are sent by their owner (the consignor) to an agent (the
consignee), who undertakes to sell the goods. Consignment deals are made on a variety of
products - from artwork, to clothing, to books. In recent years, consignment shops have become
rather trendy, especially those offering specialty products, infant wear and high-end fashion
items. Therefore,
Consignor is a business or person who makes a consignment to consignee.
Consignee is a business or person that holds consignors goods for sale and acts as
consignors agent in selling the goods.
Consigned inventory includes goods shipped by a consignor to the consignee, who acts as an
agent in selling the goods.
The consignor continues to own the goods until they are sold, so the goods appear
as inventory in the accounting records of the consignor, not the consignee. In other words,
goods on consignment are included in the inventory of the consignor (i.e., seller) while they are
excluded from the consignees (i.e., buyers) inventory. Consignee does not own the inventory
but agrees to exercise due diligence in holding and selling consigned inventory.
Differences between sale of goods and consignment
The major differences between a sale and consignment are listed in the table below:
Sale
Ownership

Consignment

Transferred to the buyer along with Property of the consignor (seller) until
the transfer of goods.
consigned inventory is sold by the
consignee (reseller).

Goods sold on Buyer is a debtor of the seller. Trade Consignee is a debtor of the
credit
receivables and trade payables consignor. Agent
and
principal
relationship.
relationship.
Return of goods Buyer cannot return goods unless Can be returned to seller (consignor)
they are defective or seller agrees to because consigned inventory is
take them back.
property of the consignor until it is sold
by the consignee.
Goods lost after Buyers loss.
delivery

CONSIGNMENT & JOINT VENTURES

Sellers (consignors) loss.

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Worked example:
Friends Company, a manufacturer of valves, ships a consignment of gas valves to a retail store
BestHome. In this case, Friends Company is a consignor while BestHome is a consignee.
Friends Company pays freight costs while BestHome pays local advertising costs and credit
card processing fees that are reimbursable from Friends Company. By the end of the period,
BestHome sells half of the consigned goods , notifies Friends Company of the sales, retains a
15% commission, and remits cash due to Friends Company.
1. Shipment of consigned inventory:
Friends Company ships gas valves costing $7,000 on consignment to BestHome. To record
the shipment of consigned inventory, Friends Company makes the following journal entry:
Account Titles
Inventory (Consignments)

Debit
$7,000

Finished Goods Inventory

Credit
$7,000

BestHome does not make any journal entry. Mere receipt of the consigned goods does
not make the consignee a debtor of the consignor. In addition, the consignee does not
record the goods as an asset in its books as such goods is the property of the consignor
until it is sold.
2.2. Accounting for payment of freight costs by consignor
2. Payment of freight costs by consignor:
Friends Company shipped the gas valves to BestHome through a third-party shipping
company, which charged Friends Company $600 for shipping goods from the factory to the
consignee (i.e., BestHome). To record the shipping expense, Friends Company makes the
following journal entry:
Account Titles
Inventory (Consignments)
Trade Payable (or Cash)

Debit

Credit

$600
$600

Again, BestHome does not make any journal entry.


2.3. Accounting of payment of advertising by consignee

3. Expenses incurred in connection with consignment:

CONSIGNMENT & JOINT VENTURES

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Friends Company does not make any journal entry until it is notified by the consignee (e.g.,
receives an Account Sales Report). Usually a consignee is entitled to be reimbursed for
expenses incurred in connection with the consignment (i.e., it depends on the consignment
agreement). Such expenses may include credit card processing fees, storage and insurance
costs, unloading charges, local advertising costs, etc.
BestHome paid $1,000 cash for local advertising costs. The consignee would make the
following journal entry:
Account Titles
Debit
Trade receivable (from Friends Company) $1,000
Cash

Credit
$1,000

2.4ccounting for sale of consigned merchandise


4. Sale of consignment:
By the end of the period, BestHome sells 50% of the consigned gas valves for $8,000.
According to the consignment agreement, BestHom must receive a 15% commission on the
sales (i.e., $1,200 = $8,000 x 0.15) and must be reimbursed for the 2% credit card
processing fee (i.e., $160 = $8,000 x 0.02).
Friends Company does not make any journal entry until it is notified by the consignee (e.g.,
receives an Account Sales Report). BestHome would make the following journal entry to
record the sale of the consigned goods:
Account Titles
Cash

Debit

Credit

$8,000

Trade payables (Friends Company)

$8,000

Expenses incurred in connection with consignment


Account Titles
Trade
Receivable
Company)
Cash

Debit
(from

Friends

Credit

$160
$160

5. Notification of sales and expenses and receipt of cash from consignee:

CONSIGNMENT & JOINT VENTURES

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BestHome notifies Friends Company of the sales and expenses by sending an Account
Sales Report, retains a 15% commission, and remits cash due to Friends Company.
Friends Company makes the following journal entry:

Account Titles
Cash

Debit

Advertising Expense

$1,000

Commission Expense

$1,200

Credit card fee

$160

Credit

$5,640

Revenue from Consignment Sales

$8,000

BestHome makes the following journal entry:


Account Titles
Trade Payable (Friends Company)
Trade

Debit

Credit

$8,000

receivable

(from Friends
Company)
Commission Revenue
Cash

$1,160
$1,200
$5,640

6. Adjustment of inventory on consignment:


Inventory on consignment should be adjusted for the cost of sales. To record the transfer of
the inventory cost to the cost of goods sold, Friends Company makes the following journal
entry:
Account Titles
Debit
Cost of Goods Sold [50% x ($7,000 +
$3,800
600)]
Consignment Inventory

Credit

$3,800

The cost of goods sold in this example includes not only 50% of the original inventory cost
(i.e., $3,500 = $7,000 x 0.50) but also 50% of the shipping expense (i.e., $300 = $600 x
0.50). BestHome does not make any journal entry.

CONSIGNMENT & JOINT VENTURES

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Consignment benefit and risks:


Depending on the nature of a consignment arrangement, the following benefits and risks may
arise for consignor and consignee, respectively:

Consignor (Seller)
Benefits

Risks

Consignee (Buyer)

Business expansion with reduced


initial and on-going costs

Reduced inventory holding costs

Better understanding of user demand

and timing of production and supply


chain activities

Operational savings

No inventory sales

Inventory lost after delivery

Reduced investment in inventory


Operational savings
Access to a wider range of inventory
Commission on sale

Risk to retain unsalable or obsolete

inventory
Extra

inventory warehousing and


handling costs not paid by consignor

4. Consig
Points to remember:
Consignor remains the owner of goods even after sending to consignee.
Consignor does not send any Invoice rather a Performa invoice.
The Amount of Sales belongs to Consignor.
All the exp. are to be borne by Consignor. If borne by consignee, recoverable
from consignor.
Consignee entitled to Commission.
Consignee entitled to de-credere commission if he is responsible for bad debts.
Consignee sends a statement called Account Sales, periodically.

Accounting Treatment Of Consignment Or


Accounts Maintained BY The Consignor
A consignment account is a combined form of trading and profit and loss account solely to
the concerned consignment. It can be treated as nominal account. An independent
consignment account for each and consignment to the name of place or consignee is to be
prepared in order to ascertain the profit or loss from that consignment.

CONSIGNMENT & JOINT VENTURES

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In order to keep complete record of consignment transactions, the consignor maintains the
following accounts:

* Consignment Account
* Consignee's Account
* Goods sent on consignment Account

The following entries are made in the books of the consignor for goods sent at proforma
invoice price or cost price:

1. For the goods sent on consignment


Consignment to .........A/C......................Dr.
To Goods sent on consignment A/c

2. For the expenses incurred by consignor


Consignment to.........A/C..............Dr.
To Bank A/C

3. For the advance received from consignee


Bank/Cash/Bills receivable A/C............Dr.
To Consignee's A/C

4. For the bills discounted

CONSIGNMENT & JOINT VENTURES

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Bank A/C...................Dr.
To Bills receivable

5. For discount on bills transferred to profit and loss account


Profit and loss A/C...................Dr.
To Discount A/c

6. For expenses paid by consignee


Consignment to..............A/c.................Dr.
To Consignee's A/c

7. For the goods sold by consignee


Consignee's A/c.................Dr.
To consignment to.................A/c

8. For the commission due to consignee


Consignment to .................A/C
To consignee's A/C

9. For closing stock with consignee


Consignment stock A/C...........Dr.
To consignment to.......A/c

CONSIGNMENT & JOINT VENTURES

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10. For profit or loss on consignment


For profit earned on consignment
Consignment to........A/C..................Dr.
To Profit and loss A/C
For loss on consignment
Profit and loss A/C.....................Dr.
To consignment to.............A/C

11. For final settlement of account with consignee


Bank A/c...............Dr.
To Consignee's A/c

12.For

goods

sent

on

consignment

transferred

to

trading

account(by

manufacturing company) or purchase account(by a trader)


Goods sent to consignment A/C..............Dr.
To trading/ purchase A/C

Difference Between Joint Venture And


Consignment
The main differences between joint venture and consignment are as under:

1. Nature
Joint venture: It is a temporary partnership business without a firm name.

CONSIGNMENT & JOINT VENTURES

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Consignment: It is an extension of business by principal through agent.

2. Parties
Joint venture: The parties involving in joint venture are known as co-ventures.
Consignment: Consignor and consignee are involving parties in the consignment.

3. Relation
Joint venture: The relation between co-ventures is just like the partners in partnership firm.
Consignment: The relation between the consignor and consignee is 'principal and agent'.

4. Sharing Profit
Joint venture: The profits ans losses of joint venture are shared among the co-ventures in
their agreed proportion.
Consignment: The profits and losses are not shared between the consignor and consignee.
Consignee gets only the commission.

5. Rights
Joint venture: The co-ventures in a joint venture have equal rights.
Consignment: In consignment, the consignor enjoys principal's right whereas consignee
enjoys the right of agent.

6. Exchange Of Information
Joint venture: The co-ventures exchange the required information among them regularly.

CONSIGNMENT & JOINT VENTURES

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Consignment: The consignee prepares an account sale which contains a details of business
activities carried on and is being sent to the consignor.

7. Ownership
Joint Venture: All the co-ventures are the owners of the joint venture.
Consignment: The consignor is the owner of the business.

8. Method Of Maintaining Accounts


Joint venture: There are different methods of maintaining accounts in joint venture.As per
agreement the co-ventures maintain their account.
Consignment: In consignment, there is only one method of maintaining account.

9. Basis Of Account
Joint venture: Cash basis of accounting is applicable in joint venture.
Consignment: Actual basis is adopted in consignment.

10. Continuity
Joint venture: As soon as the particular venture is completed, the joint venture is
terminated.
Consignment: The continuity of business exists according to the willingness of both
consignor and consignee.

A joint venture occurs when two or more businesses join together to pursue
acommon project
Basics on joint ventures
CONSIGNMENT & JOINT VENTURES

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With a joint venture, businesses remain separate in legal terms

Joint ventures are common, as firms want to benefit from collaborative


work in reaching a mutually agreed strategic target.

Many joint ventures seek to share the fixed costs of major business research /
infrastructure projects

Examples of joint ventures include:

Vodafone & Telefnica agreed in 2012 to share more of their mobile network
(with more than 18,500 mobile mast sites). This was a response to Everything

Everywhere a JV between T-Mobile and Orange


Vodafone has a joint venture with Verizon Wireless in the United States

BMW and Toyota agreed a partnership in 2011 to co-operate on hydrogen


fuel cells, vehicle electrification, lightweight materials and a future sports car.

Partnership agreements between competing automakers are common in as


manufacturers seek to pool efforts on costly technologies

West Coast between Virgin Rail /Stagecoach

Google and NASA developing Google Earth

Hollywood studios combining to fight internet piracy

Renault-Nissan's joint venture with Indian firm Bajaj to produce a 1,276 car

Intertrust Technologies - between Sony and Philips

Alliances in the airline industry e.g. Star Alliance and One World

Starbucks' expansion in India through a joint venture with the giant Tata
industrial group

Nokia Siemens Joint Networks

Joint Ventures between universities to deliver Massive Open Online


Courses(MOOCs) a fast-expanding sector of the higher education industry

CONSIGNMENT & JOINT VENTURES

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Govia, a joint venture between Go-Ahead Group and Keolis of France which
will operate the Thameslink rail franchise in London

Talk Talk agreeing in 2014 a joint venture with Sky to provide a fibre network
in York

Every one of the world's 24 biggest carmakers by sales now operates some
form of alliance or joint venture with another large carmaker.

Joint ventures
Two businesses agree to start a new project together, sharing capital, risks and profits.
Pros:

Cons:

Shared costs are good for tackling expensive projects. (e.g aircraft)
Pooled knowledge. (e.g foreign and local business)
Risks are shared.
Profits have to be shared.
Disagreements might occur.
The two partners might run the joint venture differently.

nees accounting controls for consigned inventory

CONSIGNMENT & JOINT VENTURES

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CONSIGNMENT & JOINT VENTURES

ACCOUNTING

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CONSIGNMENT & JOINT VENTURES

ACCOUNTING

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Candidates should be able to distinguish between consignments and joint ventures and the
environment in which they operate. Candidates should be able to:

Prepare ledger accounts for consignment transactions, including the calculation of


closing inventory valuation

Prepare ledger accounts for joint ventures and calculate the profit for joint ventures.

CONSIGNMENT & JOINT VENTURES

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