Chapter 2
Accounting For Consignment
Learning Objectives
• Define and explain the terms consignment,
consignor and consignee.
• What is the difference between consignment
and sale?
• Make journal entries in the books of consignor
and that of consignee.
• Prepare consignment account and consignee's
account in the books of consignor.
Consignment
The word consignment can be generally defined as
the act of sending a quantity of goods by the
manufacturers or 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.
Conti…
1. Goods sent on consignment do not become the
property of the consignee. The ownership remains
with the sender or the consigner.
2. If the goods are destroyed, the receiver (consignee) is
not responsible. The loss will fall on the consignor.
3. The consignee tries to sell the goods according to the
instructions of the consignor.
4. When the goods have been sold, consignee will
deduct his expenses, commission, etc., from the sale
proceeds and the balance is remitted to the
consignor.
Conti…
5. The relationship between the consignor and the
consignee is that of principle and agent.
6. The consignee is entitled to his remuneration which
is generally fixed on the basis of a commission of
sales.
7. The expenses incurred by the consignee must also
be reimbursed by the principal.
Difference Between Consignment and Sale
1. 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 with the
consignor till the goods consigned are sold by the
consignee.
Conti…
2. 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.
Conti…
3. 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.
4. 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.
Conti….
5. 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.
6. 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
Important Terms
1. 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.
2. Del Credere Commission: It 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.
Conti…
3. Advance Against Consignment: Generally the
consignor insist the consignee for some advance
payment for the goods consigned at the time of
delivery of goods. This advance payment is adjusted
in full against the amount due by the consignee on
account of the goods sold.
4. 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.
Conti…
5. 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.
6. 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.