Consignments

Consignments

The Account in the Consignors and Consignee’s Books

Show the account in the consignors and consignee’s books

Consignment Overview

Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee), who undertakes to sell 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.

Consignment Accounting – Initial Transfer of Goods

When the consignor sends goods to the consignee, there is no need to create an accounting entry related to the physical movement of goods. It is usually sufficient to record the change in location within the inventory record keeping system of the consignor. In addition, the consignor should consider the following maintenance activities:

• Periodically send a statement to the consignee, stating the inventory that should be on the consignee’s premises. The consignee can use this statement to conduct a periodic reconciliation of the actual amount on hand to the consignor’s records.
• Request from the consignee a statement of on-hand inventory at the end of each accounting period when the consignor is conducting a physical inventory count. The consignor incorporates this information into its inventory records to arrive at a fully valued ending inventory balance.
• It may also be useful to occasionally conduct an audit of the inventory reported by the consignee.

From the consignee’s perspective, there is no need to record the consigned inventory, since it is owned by the consignor. It may be useful to keep a separate record of all consigned inventory, for reconciliation and insurance purposes.

Consignment Accounting – Sale of Goods by Consignee

When the consignee eventually sells the consigned goods, it pays the consignor a pre-arranged sale amount. The consignor records this prearranged amount with a debit to cash and a credit to sales. It also purges the related amount of inventory from its records with a debit to cost of goods sold and a credit to inventory. A profit or loss on the sale transaction will arise from these two entries.

Depending upon the arrangement with the consignee, the consignor may pay a commission to the consignee for making the sale. If so, this is a debit to commission expense and a credit to accounts payable.

From the consignee’s perspective, a sale transaction triggers a payment to the consignor for the consigned goods that were sold. There will also be a sale transaction to record the sale of goods to the third party, which is a debit to cash or accounts receivable and a credit to sales.

Consignment 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. It is important to understand that the agent never owns the goods.

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.

Problem 1 (Journal Entries and Ledger Accounts):

Riaz Sugar Factory of Multan, consigned to Mr. Shahid of Lahore 400 bags of sugar at $25 per bag. They also paid cartage, freight, etc. $250. The consignor drew on consignee as an advance against the consignment at 3 months for $6,000 which they discounted at their bank at 5 percent. The consignee sold off the goods and rendered an account sales showing that the goods realized $12,000, out of which he deducted his charges amounting to $80 and his commission at 5 percent.

Required: Make journal entries in respect of the above transactions in the books of consignor as well as the consignee

Solution:

Consignor’s Books

JOURNAL ENTRIES

LEDGER ACCOUNTS

Consignment to Lahore Account

Goods Sent on Consignment Account

Bank Account

Shahid Ali (Consignee)

Bills receivable Account

Discount Account

Profit and Loss Account

Trading Account

Consignee’s Books

JOURNAL ENTRIES

LEDGER ACCOUNTS

Riaz Sugar Factory (Consignor)

Bank Account

Commission Account

Bills Payable Account

Problem 2 – (Abnormal Loss):

1,000 Motors were consigned by A & Co., of Lahore to Bashir of Karachi at an invoice cost of $150 each. A & Co., paid freight $10,000 and insurance $1,500. During transit 100 motors were completely destroyed. Bashir took delivery of the remaining motors and paid $14,400 as duty.

Bashir sent a bank draft to A & Co., for $50,000 as an advance payment and later sent an account sale showing that 800 motors were sold at $220 each. Expenses incurred by Bashir on godown rent and advertisement etc., amounted to $2,000. Bashir is entitled to commission of 5 per cent.

Required: Prepare consignment account and Bashir’s account in the books of A & Co., assuming that nothing has been recovered from the insurance company due to defect in the policy.

Solution

Consignment to Karachi Account

Bashir

Working Note:

Problem 3 (Invoicing Goods Higher Than Cost):

Rashid of city A sends 100 sewing machines on consignment to Malik of city B. The cost of each machine is $130 but the invoice price is at the rate of $160 each. Rashid spends $400 on packing and despatch. Malik receives the consignment and immediately accepts Rashid’s draft for $8000. Subsequently, Malik informs Rashid that 80 machines have been sold at $175 each. Expenses paid by Malik are; freight $600, godown rent $50, and insurance $100. Malik is entitled to a commission of 6 per cent on sales and 1-1/2 percent as del credere commission.

Give journal entries in the books of Rashid . Also prepare necessary ledger accounts:

Solution:

Journal

Consignment to City B Account

Malik

The Transfer of the Consignee’s and Consignee’s Accounts to the Profit and Loss Account

Show the transfer of the consignee’s and consignee’s accounts to the profit and Loss Account

Profit and Loss Account

Preparation of the Accounts Sales

Prepare the Accounts sales

Activity 1

Prepare the Accounts sales

The Consignment Inward Account in the Book of the Consignee

Show the consignment Inward Account in the book of the Consignee

Activity 2

Show the consignment Inward Account in the book of the Consignee