Chapter – 1
Consignment Accounting
Chapter outcomes:
1. Meaning and nature of consignment;
2. Terms used in consignment operations;
3. Difference between consignment and sale;
4. Valuation of unsold stock lying with the consignee;
5. Treatment of abnormal loss;
6. Accounting entries in the books of consignor;
7. Accounting entries in the books of consignee;
8. Practical exercises;
Meaning of consignment
Consignment means the transaction of sending
goods by one person to another, who is to sell
goods on behalf of the first person.
The person who sends the goods is known as
consignor and the person whom the goods are
sent is known as consignee.
The legal relationship between these two
persons is that of principal and agent.
Important terms in consignment
1. Pro forma invoice: when the consignor sends the goods
to the consignee, he prepares only a pro forma invoice
and not an invoice. A pro forma invoice looks like an
invoice but is really not one. The objective of the pro
forma invoice is only to convey information to the
consignee regarding particulars of goods sent and not to
make him liable like a trade debtor.
2. Del-credere commission: Del-credere commission is an
additional commission paid by the consignor to the
consignee for bearing the loss on account of bad debts, if
any, arising out of credit sale of consignment goods.
Such commission may be allowed on credit sales or total
sales. However, in the absence of any such agreement,
the consignor allows such commission on total sales.
Important terms in consignment (contd.)
3. Accounting sales:
An account sales is a statement sent by the consignee to
the consignor periodically. It contains the information the
following information:
1. Sales made;
2. Expenses incurred on behalf of consignor;
3. Commission earned;
4. Advance money paid;
5. The balance of amount due to the consignor.
An account sale is different from sales account which
gives the details of the sales made.
Distinction between consignment and sale
Basis of distinction
Consignment
Sale
1. Nature of relationship
The relationship between The relationship between
the consignor and the the seller and the buyer is
consignee is that of that of creditor and debtor.
principal and agent
2. Ownership and
possession of goods
Only the possession and
not the ownership is
transferred
to
the
consignee
Both
ownership
and
possession is transferred
from the seller to the
buyer
3. Risk of goods
Risks remain with the
consignor
because
ownership remains with
the consignor
Risk remains with the
buyers as the ownership in
the goods is transferred to
the buyer
4. Pro forma invoice
Consignor prepares a pro Seller prepares a sales
forma invoice only
invoice
5.Subject matter of dealing
Only moveable property Any property may be its
may be its subject matter
subject matter
6. Profit or loss
Consignee is not any way After the sale is complete,
Valuation of unsold stock of the consignment
Basically stock is to be valued at cost price or market
price whichever is lower on the base of ‘conservatism’.
Cost price for this purpose means the purchase price
plus expenses which are incurred to bring the goods to
their present location and condition.
Market price here refers to net realizable value, that is,
the value which shall be realized if unsold goods in
stock are disposed off in the market and not the
‘replacement value’ .
Treatment of abnormal loss
Abnormal loss an avoidable loss and is usually caused
by fire, theft, abnormal spoilage leakage/breakages/
pilferages, etc.
It is not treated as a part of cost. Its value is calculated
in the same manner as the value of unsold stock. The
following entry is passed in the account for the
abnormal loss:
Profit and loss account Dr. XXXX
Insurance Company A/C Dr. XXXX
Consignment Account Cr
XXXX
Pro forma Journal entries in the books of Consignor
The following journal entries are passed in the books of consignor:
1. When the goods are sent on consignment:
Consignment Account Dr. XXXX
Goods sent on consignment account Cr. XXXX
(Being the goods sent on consignment)
2. When expenses are incurred by the consignor:
Consignment Account Dr. XXXX
Bank/Cash account Cr.
XXXX
(Being the expenses paid on consignment)
3.When any advance money is received from the consignee:
Cash/Bank/Bills Receivable Account Dr. XXXX
Consignee Account
XXXX
(Being the advance money received)
4. When the expenses are incurred by the consignee:
Consignment account Dr. XXXX
Consignee account Cr.
XXXX
(Being the expenses incurred by the consignee)
5. When goods are sold by the consignee:
Consignee account Dr. XXXX
Consignment account Cr.
XXXX
(Being the goods sold by the consignee)
6. When the commission is due to the consignee:
Consignment account Dr. XXXX
Consignee account Cr.
XXXX
(Being the commission due to the consignee)
7. When there is stock in consignment:
Consignment stock account Dr. XXXX
Consignment account Cr.
XXXX
(Being the stock on consignment
8. When there is any abnormal loss:
Profit and loss account Dr. XXXX
Insurance Company Ac. Dr. XXXX
Consignment account Cr.
XXXX
(Being the abnormal loss in consignment)
9. Profit or loss in consignment:
If profit: Consignment account Dr. XXXX
Profit and loss account Cr.
XXXX
If loss : Profit and loss account Dr. XXXX
Consignment account Cr.
XXXX
10. When the balance amount is received from consignee:
Bank/Cash/ Bills Receivable account Dr. XXXX
Consignee account Cr.
XXXX
(Being the balance received from the consignee)
11. Transfer of goods sent on consignment:
Goods sent on consignment account Dr. XXXX
Trading account Cr.
XXXX
(Being the consignment account transferred to trading account)
Pro forma Journal entries in the books of Consignee
1. When the advance money is sent to consignor:
Consignor account Dr. XXXX
Bank/ Cash/ Bills payable account Cr. XXXX
(Being the advance money paid to consignor)
2. When expenses are incurred by the consignee:
Consignor account Dr. XXXX
Bank account Cr.
XXXX
(Being the expenses incurred by the consignee on consignment)
3. When goods are sold by the consignee:
Cash/bank/ debtors account Dr. XXXX
Consignor account Cr.
XXXX
(Being the goods sold)
4. When the commission is due from consignor:
Consignor account Dr. XXXX
Commission account Cr.
XXXX
(Being the commission due from the consignor)
5. When the balance money is remitted to the consignor:
Consignor account Dr. XXXX
Bank/Cash/ Bills Receivable Account Cr. XXXX
(Being the balance remitted to the consignor)
6. Transfer of commission to profit and loss account:
Commission account Dr. XXXX
Profit and loss account Cr.
XXXX
(Being the commission transferred to the profit and loss account)