CONSIGNMENT ACCOUNTS

Dr. Avijit Roychoudhury

Inspector of Colleges
Vidyasagar University
Consignment accounting is a term used to refer to an arrangement
whereby goods are sent by their owner (consignor) to an agent
(consignee) who holds and sells the goods on behalf of the owner for a
commission.
Both the owner and the agent maintain their own records, and the
consignment accounting will be different for each party.
Significant features :
 Here, the principal 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 rests with the 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 proceeds from sale
belongs to owner (consignor).
Consignment – not a sale
 Ownership − Ownership of goods need to be transferred from
seller to buyer in case of sale, but ownership of goods rests 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.
 Return of Goods − Usually, the sold goods cannot be returned
back; save in the event of manufacturing defect or any other
technical fault. On the other hand, consignee may return the
unsold stock of goods to consignor anytime.
 Some 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.
•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.
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 − 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.
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.
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 lower. 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.

Net quantity received = Goods consigned quantity – Normal Loss

•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. In the Books of Consignor In the Books of Consignee
No.
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
To Consignee A/c
consignee, then consignee’s A/c will be
(Being Insurance premium paid)
credited.
2 Abnormal Loss A/cDr
At the time of Abnormal Loss To Consignment A/c
(Being Loss Incurred)
3 Insurance Company (Name of the
Acceptance of Claim by Insurance insurer) A/cDr
Company To Abnormal Loss A/c
(Being claim admitted)
Sr. In the Books of Consignor In the Books of Consignee
No.
4 Bank A/c Dr
On receipt of Claim To Insurance Company A/c
(Being amount of claim received)
5 Profit & Loss A/c Dr
To Abnormal Loss A/c
In Case of Loss
(Being amount of Abnormal Loss
transferred)
Summary of Accounting Entries
Sr. In the Books of Consignor In the Books of Consignee
No.
1 When goods are sent to the consignee
Consignment A/c Dr No need to do any Entry
To Goods Sent on Consignment A/c in this case
(Being Goods Sent on Consignment)
2 Expenses Incurred by Consignor
Consignment A/c Dr
Not Applicable
To Cash/Bank A/c
(Being Expenses incurred on consignment)
3 Advance given by consignee Consignor A/c Dr
Cash/Bank A/c Dr To Bank/Cash A/c
To Consignee’s A/c (Being Advance amount
(Being advance received from consignee) paid to Consignor)
Sr. In the Books of Consignor In the Books of Consignee
No.
4 Expenses Incurred by Consignee
Consignor A/c Dr
Consignment A/c Dr
To Bank/Cash A/c
To Consignee’s A/c
(Being Expenses incurred on
(Being Expenses incurred by consignee)
goods received on consignment)

5 Sale by Consignee
Cash (for cash sale) A/cDr
Consignee’s A/c Dr
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
Consignment A/c Dr Consignor A/c Dr
To Consignee’s A/c To Commission A/c
(Being Commission on sale due to (Being Commission earned)
consignee)
Sr. In the Books of Consignor In the Books of Consignee
No.
7 Remittance from Consignee
Consignor A/c Dr
Cash/Bank A/c Dr
To Bank/Cash A/c
To Consignee’s A/c
(Being Balance due Payment
(Being due amount received from
made to consignor)
consignee)
8 Entry for Profit on Consignment
Profit & Loss A/c Dr
Not Applicable
To Consignment A/c
(Being Profit earned on consignment)
9 Loss on Consignment
Consignment A/c Dr
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.
Problem # 1
Raja Mills Ltd. of Ahmedabad sent 100 pieces shirting to Fancy Stores, Delhi, on
consignment basis. The consignees are entitled to receive 5 per cent commission
plus expenses. The cost to Raja Mills Ltd. is Rs 600 per piece.
Fancy Stores, Delhi, pay the following expenses: Railway Freight, etc. Rs 1,000,
Godown Rent and Insurance Rs. 1,500
Raja Mills Ltd., draw on the consignees a draft for Rs 30,000 which is duly
accepted. It is discounted for Rs 28,650. Later Fancy Stores, Delhi, report that the
entire consignment has been sold for Rs 78,000. Show the important ledger
accounts in the books of the consignor.
Problem # 2
The Swastik Oil Mills, Mumbai consigned 5,000 kg. of castor oil to Dass of Kolkata on 1st
January, 2012. The cost of the oil was Rs 460 per kg. The Swastik Oil Mills paid Rs 2,00,000
for packing, freight and insurance. During transit 125 kg. were accidentally destroyed for
which the insurers paid, directly to the consignors, Rs 45,000 in full settlement of the claim.
Dass took delivery of the consignment on the 10th January. On 31st March, 2012 Dass reported
that 3,750 kg. were sold at Rs 600, the expenses being on godown rent Rs 30,000, on
advertisement Rs 40,000 and on salesmen’s salaries Rs 64,000. Dass is entitled to a
commission of 3 per cent plus 1½ per cent del credere. A party which had bought 500 kg. was
able to pay only 80% of the amount due from it.
Dass reported a loss of 50 kg, due to leakage. Assuming that Dass paid the amount
due by bank draft, show the accounts in the books of both the parties. Books of
accounts are closed by the parties on 31st March.
Problem # 3
The Kochi Consignment Account in the books of Remi of Kottayam showed a
debit balance of Rs 1,500 representing the cost of 10 pieces of fancy goods on 1st
April, 2011. The invoice value of each piece was Rs 175. On 1st May, 2011 Ranaji sent
a further consignment to Cochin of 40 pieces, costing Rs 160 each, invoiced
proforma at Rs 180 each. The freight and other charges amounted to Rs 210.
On 21st March, 2012, the Kochi Agent sent an Account Sales showing that 8 pieces
from the old stock realised Rs 140 each and 25 pieces from the second consignment
realised Rs 200 each and 15 pieces remained in stock unsold. Two pieces from the
old stock, being unsaleable at Kochi, were returned to Mumbai, for which the Kochi
Agent sent a separate debit note for Rs 30, being expenses incurred by him as
packing and freight.
The Kochi Agent is entitled to a selling commission of 10 per cent which covers all
our-of-pocket expenses in respect of the consignment Show the necessary account
in the books of the consignor, supposing that he closes his accounts on 31st March.