10 Consignment

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CONSIGNMENT ACCOUNTS1. What is a consignment?

A consignment is sending of goods by the owner to his agent to be sold on behalf ofand at the risk of the owner in return for a fixed rate of commission on the gross sale

proceeds.

The person who sends the goods is called principal or consignor and the person towhom goods are sent is called agent or consignee.

2. What are the features of a consignment transaction?

The main features of a consignment transaction are as follows:

i) Consignment of goods is a mere transfer of possession of goods from one

person to another for the purpose of rate but it is not a sale.ii) The relationship between the consignor and the consignee is that of principal

and an agent.

iii) The ownership in the goods does not pass on to the consigneeiv) Consignee sells the goods on behalf of and at the risk of consignor.

v) Consignee gets fixed rate of commission on gross sales for his service.

. What are the !ifferences "et#een a consignment an! a sa$e %An& four'

The difference between consignment and sale are as follows:

(oints Consignment Sa$es

1. wnership

!. "elivery of goods

#. $isk

%. $elationship

&. 'tatement of

account

(. $eturn of goods

. Commission

*. +overning Act.

wnership of goods consignedremains with the consignor

Consignee gets actual delivery

of goods$isk connected with the goods

remains with the consignor

The relationship betweenconsignor and consignee is a

principal and an agent.

Consignee has to send account

sales statement to consignor

Consignee can return unsold

goods to the consignorConsignor gives commission

to the consignee

,ndian Contract Act- 1*!

wnership of goods soldpasses from seller to buyer

+oods may or may not be

delivered to buyer$isk goes to the buyer

The relationship is buyerand seller or debtor and

creditor

uyer need not send any

such statement.

uyer cannot return.

'eller does not give any

such commission to the

buyerThe sale of +oods Act-

1/#0

). E*+$ain the fo$$o#ing,

a) Consignment utward

b) Consignment ,nwardhen the consignor sends the goods to consignee- from the point of view of

consignor- the consignment of goods is called consignment outward. The consigned

goods remain legal property of the consignor until they are sold.

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hen consigned goods are received by the consignee to be sold on behalf of and at

the risk of his principal- the consignee considers the consignment as consignment inward.

-. What is a +roforma in/oice?

4ro5forma invoice is a statement prepared and sent by the consignor to the consignee

containing the details of goods sent. ,t contains particulars of 6uantity- 6uality and priceof goods sent and also special instructions for selling the goods.

,t is called pro5forma invoice because it does not make the consignee responsibleto pay the amount stated there in.

0. What is an account sa$e?

,t is a statement prepared by the consignee either on completion of sales or at

periodical intervals. This statement gives particulars of:

i) +ross salesii) 7xpenses incurred

iii) Commission due

iv) Advance paidv) 8et amount due from the consignee to the consignor.

. What are the !ifferences "et#een +roforma in/oice an! account sa$es?

The differences between pro5forma invoice and account sales are as follows:

(oints (roforma In/oice Account sa$es

1. 4reparation

!.,nformation

#.$esponsibility of

payment

%. hen it is sent

,t is prepared and sent by the

consignor to the consignee.+ives particulars of goods sent

,t does not make the consignee

responsible to pay the amount

stated there in.,t is sent only once along with the

goods

,t is prepared and sent by

the consignee+ives particulars of goods

sold

,t makes the consignee

responsible to pay.

,t is sent at periodical

intervals.

. What are !ifferent t&+es of commissions?

,n consignment transaction consignee may receive the following types of

commissions:i) Or!inar& Commission, ,t is the remuneration paid by the consignor to the

consignee for his service. ,t is calculated at an agreed percentage on the total sale

ii) 3e$cre!ere Commission, ,t is a special commission paid by the consignor to

the consignee for taking extra risk i.e. risk of bad debt. This commission iscalculated either on the gross sales or on the credit sales. 9,n the absence of

information it is calculated on the gross sales)iii) O/erri!ing Commission: ,t is a special commission allowed by the consignor to

the consignee over and above the ordinary commission. This commission is

allowed with an obect to sell goods at a higher price. ,t is an extra incentive to the

consignee usually allowed if the total sales exceed a specified target. ,t may becalculated on the total sales or on the excess of total sales over the invoice price.

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4. What !o &ou mean "& recurring e*+enses?

$ecurring expenses are those indirect expenses- which are incurred after the goods

have reached the place of consignee. 7xamples of recurring expenses are:i) +odown rent

ii) +odown insurance

iii) Commissioniv) Advertisement

v) 'alesman;s salaries.

4. What !o &ou mean "& non recurring e*+enses?

8on5recurring expenses are those expenses- which are incurred from the time of

goods sent by the consignor till the time goods reach the business premises of theconsignee. As such expenses normally increase the value of goods- a proportionate part of

such expenses must be added while valuing consignment stock. 7xamples of non5

recurring expenses are:i) nloading charges

vi) ctroi

vii) Carriage- cartage- etc.viii) Custom duty- import duty- etc.

15. What are the !ifferences "et#een Or!inar& commission an! 3e$cre!ere

commission?

The important differences are:

rdinary commission is allowed to the consignee as remuneration for his service.

"el5credere commission is allowed to the consignee when he undertakes the risk

of bad debt.

rdinary commission is paid at an agreed rate on the total sales.

"el5credere commission is paid at an agreed rate either on total sales or credit

sales

,n return of this ordinary commission- consignee guarantees only the proceeds of

cash sales.,n return of del5credere commission consignee guarantees the proceeds of cash

and credit sales.

11. What are the !ifferences "et#een !e$cre!ere commission an! o/erri!ing

commission?

The important differences are

4oints "el5credere commission ver5riding commission

1. bect ,t is allowed to the consignee when

he has undertaken risk of bad debt.

,t is allowed to the

consignee when he sells

goods at a higher price.

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!. +uarantee

#.Calculation of

Commission

Consignee guarantees the proceeds

of consignment sale

,t is calculated at an agreed rate

either on total sales or credit sales

,n return of this

commission- consigneedoes not give any

guarantee

"epending upon the terms

it may be calculated ontotal sales or on excess of

total sales over invoiceprice.

12. Name an! e*+$ain the im+ortant accounts o+ene! in the "oo6s of consignor.

,mportant accounts- which are opened in the books of consignor- are:i) Consignment Account. ,n order to find out profit or loss on consignment- the

consignor keeps a separate account called Consignment Account.

Consignment Account is the nominal account ust like Trading Account. Thisaccount is debited with the amount of goods sent- expenses incurred on

consignment by the consignor as well as consignee and credited with amount

of sale and the value of stock with consignee at the end. ,f the debit side of the

consignment Account exceeds the credit side- the result is loss: when thecredit side is more- the result shall be profit. The profit or loss on consignment

is transferred to the 4rofit and


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account for valuing consignment stock and the expenses incurred by the consignee

should be ignored.

1). 8o# is !iscounting charges on "i$$ treate!?

hen the bill is discounted it is dealt with in two ways. They are:

i) @ay be considered as financial expense of the business and charged to the4rofit


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21. What !o &ou mean "& a"norma$ $oss?

The loss- which arises due to abnormal causes such as fire- flood- theft- accident- etc.

is called abnormal loss. Abnormal loss is calculated in the same manner as the valueof unsold stock on consignment.

8ote: hile calculating the loss- proportionate value of non5recurring expense prior

to loss is added to the cost price of abnormal loss.

22. Gi/e accounting entries for recor!ing a"norma$ $oss.

S$.No. (articu$ars Amount

1.

!.

#.

=or abnormal loss: Abnormal loss Account "r.

To consignment Account.

=or the loss recovered from the insurance company:ank Account "r.

To Abnormal loss Account.

=or the transfer of balance in Abnormal loss Account:4rofit


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books the books

& 8ature ,t is unavoidable loss ,t is avoidable loss

2-. Wh& is consignee not treate! as a consignor7s !e"tor?

Consignee is not treated as consignor;s debtor becauseG mere receipt of goods does not

make consignee a debtor of the consignor. He becomes indebted to the consignor whenhe sells goods and realiEes money. =urther the relationship between consignor and

consignee is that of principal and agent and not seller and buyer.

20. What are the o";ecti/es of consignment?

The obectives of consignment are:

9i) To get the advantage of difference in price.

9ii) To enter into the new market.

9iii) To bridge the gap between buyer and seller.

2. 8o# !oes +roforma in/oice !iffer from an in/oice?

A sales invoice charges the buyer with the value of goods but pro5forma cannot charge

the consignee for the value of goods.

2. 8o# is !istinction "et#een recurring an! nonrecurring e*+enses re$e/ant in

consignment account?

This distinction is important because while valuing unsold stock only the proportionatevalue of non5recurring expenses are added to the cost price.

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10 Consignment