CONSIGNMENT AND JOINT VENTURE – ACCOUNTING ASPECTS
by : DR. T.K. JAIN AFTERSCHO☺OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE – PGPSE / CSE PARTICIPANTS mobile : 91+9414430763 5 DECEMBER 09
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My words....
Here I present basic aspects of consignment and joint venture – accounting aspects . I wish that more people should become entrepreneurs. An ordinary Indian entrepreneur wishes to remain an honest entrepreneur and contribute to the development of nation,let us support entrepreneurs ..
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What is consignment ?
When a business person sends his goods to someone else so that the other person can sell it out. It is consignment. The first person remains the owner, but the second person takes the possession and sells out the goods on behalf of the first person. 5 DECEMBER 09
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Who is consignor / consignee?
Cosignor = the person who sends the goods. He is the owner of the goods. He bears the risks related to goods Consignee = who receives the goods. He tries to sell the goods on behalf of consignor 5 DECEMBER 09
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What is the difference between sale and consignment ? In sale, there is transfer of ownership. But in consignment, goods are sent, but ownership remains with the consignor and the consignee tries to sell the goods. In case of sale, goods generally dont come back. In consignment, unsold goods are taken back by consignor. 5 DECEMBER 09
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What is proforma invoice ?
It is prepared by consignor it accompanies goods – when goods are sent to consignee
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What is account sales ?
It is prepared by consignee. It shows the sales undertaken by consignee
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What is the benefit to consignee ?
Consignee gets commission on goods sold. Suppose rate of commission is 10%, and consignee sells out goods of Rs. 4 lakhs. The commission of consignee is Rs. 40000. Consignor is bound to pay this commission
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What are consignment expenses ?
There are many expenses incurred in the process of consignment. When goods are despatched, there are carriage, freight, insurance and other expenses. All the expenses are borne by consignor .
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What is over-riding commission ?
Over-riding commission is allowed by the consignor to the consignee to promote sale at higher price than specified or to encourage consignee to put more work in introducing new product in the market.
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How to valuate stock ?
Stocks (inventory) have to be valued at cost. Generally consignment is sent at invoice price. But the stocks have to be shown at cost. So when consignor is preparing final accounts, adjustment has to be made from the stock to arrive at cost price. 5 DECEMBER 09
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Example : A sent goods of invoice price 1200 to B. Which are lying in godown of B. What inventory will you show on 31/3/10? Invoice price is 20% above cost. Here we have to prepare stock reserve account to adjust for the profit element in stock. 20/120 * 1200 = 200 so 200 will be transferred to stock reserve account. Thus inventory will be of (1200 – 200) = 1000 only in real terms (at cost). 5 DECEMBER 09
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What accounts are prepared by consignor ?
He prepares 2 accounts : 1. consignment to XYZ account 2. consignee account
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What accounts are prepared by consignee ?
1. consignor account 2. conignment inward book
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What entries are made by consignor while despatching goods ?
consignment account Dr. To Goods sent on consignment account
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What entries are made by consignor when consignee sells goods ?
Consignee a/c debit to consignment a/c
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What entry is made by consignor when expenses are incurred by consignee ?
Consignment a/c debit to consignee a/c credit
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What entry is made by consignor when he himself incurs expenses ?
Consginment a/c debit to bank a/c credit
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What are the contents of consignment a/c ? • DEBIT SIDE • CREDIT SIDE • Opening st stock • Sales by by co consignee • All the expenses, • Stoc Stock k (cl (closi osing stoc stock) k) details of goods sent, • Expenses incurred by consignee • Profit 5 DECEMBER 09
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What are the contents of consignee account ? • DEBIT SIDE • Details of goods sold by consignee (consignment a/c ) • •
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• CREDIT SIDE • All the expenses • (consignment account) • Bank / cash payments received from consignee
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What accounting entry will be made when consignee receives goods from consignor ? No accounting entry is required the consignee is not the owner of the goods, hence, no accounting entry is required. However, there is a book maintained by consignee, which shows the arrival of the goods. This is called consignment inward book. 5 DECEMBER 09
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What accounting entry is required when consignee sells the goods (in the books of consignee) ?
Bank a/c Debit or Cash a/c debit to consignor a/c credit
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What accounting entry is required when consignee spends money on behalf of consignor (in the books of consignee) ?
Consignor a/c debit to bank / to cash ac credit
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What accounting entry is required for closing stock (in the books of consignor) ?
Stock in consignment a/c debit to consignment a/c credit
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What accounting entry is required for closing stock (in the books of consignee) ?
No entry is required (as these goods are the property of consignor )
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Solve this question Eekshwanku sent to Eklavya 1,000 pieces of goods on consignment basis; one piece costing Rs. 230. Eekshwanku sent Rs. 200 on packing, Rs. 400 on freight and Rs. 1,000 on insurance in transit. Eklavya paid octroi duty amounting to Rs. 1,200 and cartage Rs. 1,300 to bring goods to his godowns. In course of time Eklavya also spent Rs. 1,500 on insurance and rent of godown and paid Rs. 4,000 as salaries to salesman. Just before close of accounting period, Eklavya reported that he had sold 800 pieces at Rs. 300 per piece. Eklavya is entitled to a commission @ 5% of gross sales. 5 DECEMBER 09
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Consignment account • DEBIT • To goods sent on consignment 230000 • To bank
1600
• To consignee(expenses) • 8000 • To con consi sign gnee ee (com (commi miss ssio ion) n) • 1200 • Profit : 46020 • Total : 286,820 •5 DECEMBER 09
• CREDIT SIDE • By consignee 240000 • By closing stock • (see next slide for valuation) • = 46820 •Total: 286,820
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Consignee account • DEBIT SIDE • To cons consiignme nment a/c a/c (sale) 240000
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• CREDIT SIDE • By cons onsignm gnment ent a/c a/c (expenses) 8000 • By cons onsignm gnment ent a/c a/c • (commission) 1200 • By bala alace / bank (if he pays) (balancing figure) 230800
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Calculation of closing stock While calculating closing stock, we add all the non-recurring expenses in the value of closing stock cost of stock 200*230 =46000 (200+400+1000+1200+1300) 4100 * 200/1000 =820 total cost =46820 5 DECEMBER 09
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How to handle loss ? • Ther here are are two types pes of loss : 1 normal 2 abnormal loss • we have separate accounting for these
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How to adjust normal loss in consignment ?
While calculating the value of stock on consignment, the cost is inflated to cover the normal loss.
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1,000 tonnes of limestone is consigned @20 per tonne, freight thereon being Rs. 4,000. the quantity sold is 600 tonnes and that unsold is 350 tonnes,there is a normal of loss 50 tonnes.
Here cost of closing stock will be inflated as under : (cost) * unsold goods / total goods for sale =(20000+ 4000) * 350 / 950 = 8843 answer 5 DECEMBER 09
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How to handle abnormal loss ? There are two possibilities : 1. loss is insured 2. loss is not insured if loss is insured, the insurance company will pay the money. So create an abnormal loss account and close it from the money received from insurance company. If there is no insurance, the entire loss must be transferred to Profit and loss account 5 DECEMBER 09
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What is joint venture ?
When two or more firms / individual join together to work on a project, it is called joint venture. It is not partnership, as it is just a project on which they are working together.
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What is the difference between joint venture and partnership ? Partnership has a new firm, with new name, new set up Partnership is lasting,. Partnership enables firm to have a consolidated financial system Joint venture is temporary association and it doesnt have a new firm 5 DECEMBER 09
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What are the systems of accounting in joint venture ?
There are 2 possibilities : 1. when separate books are maintained 2 when separate books are not maintained
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when separate books are maintained
Each party in the joint venture must have following accounts : 1. Joint Venture account 2. Joint venture party account (personal account of the other party) 5 DECEMBER 09
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Memorandum method
Here each party maintains following accounts : 1. Memorandum joint venture account 2. joint venture party account (personal account of the other party)
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Example On 1st January 2007 B and C entered into a joint venture sharing the profits in the ratio of 3:2 after allowing a salary of Rs. 2000 p.m. to C. B sent out of his stock of goods costing Rs.5,00,000 to be sold by the latter and incurred expenses amount to Rs. 10,700. On 3rd January, 2007, C accepted a bill of exchange at 2 months for Rs. 3, 00,000 drawn by B. By 31st March, 2007 C had sold goods for Rs. 6, 00,500 after incurring expenses amounting to Rs. 11,450. C agreed to take over the remaining goods for Rs. 20,000. C forwarded a cheque immediately to settle the account. Show the Journal and Ledger Account in the books of B and C. 5 DECEMBER 09
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Joint venture accoung in the books of B • DEBIT SIDE • To goods sent / Trading / purchase 5 lakh • To bank • To C
10700
11450
• • • •
CREDIT SIDE By C (sale ) 600500 By C 20000 Total : 620500
• To C (salary) 6000 • To profit 92350 • (B= 55410)
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Joint venture party a/c C's personal account (in the books of B )
• DEBIT SIDE • Joint oint vent ventu ure (S (Sale) 600500 • Joint oint vent ventu ure (s (stock ock taken over) 20000 • Total : 620500
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• CREDIT SIDE • By bill receivable 3 lakh • By joint venture (expenses+salary) 17450 • By profit (share) 36940 • Total : 354390 • Bank : 266 266110 (ba (ballancing figure to be paid by C to B )
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When separate books of accounts are maintained for joint venture ? Here there are separate books of joint venture account. These books are maintained in the joint venture itself. Thus each party need not maintain complete accounts. Here we have following accounts : 1. joint venture account 2. joint bank account 3. personal account of the joint venture party 5 DECEMBER 09
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Details of the accounts : Joint Venture Account :
just like Trading and Profit and Loss Account for the venture showing purchase of goods, expenses, sale of goods etc. Balance of this account will show profit or loss of business and is distributed between co-venturers. Joint Bank Account :
separate bank account opened in the joint names showing receipts and payment of cash. Personal Accounts of Co-venturers : It is the capital accounts of the co-venturers showing, investment, entitlements, entitlements, receipts and drawing by the co-venturers. 5 DECEMBER 09
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Example :
A and B entered into a joint venture to construct a building building of a new company. Profit and loss were to be shared in the ratio of 3:2. A invested Rs. 2,00,000 and B Rs. 1,00,000. The money was deposited to a joint bank account with arrangement of overdraft of Rs. 2,00,000. A also supplied materials valued Rs. 35,000 and B paid the architects fees of Rs. 15,000. B also supplied a machine machine valued Rs. 25,000. Building materials valued Rs. 4,00,000 and wages Rs. 1,00,000. They collected Rs 100000 from the the joint venture.
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Joint venture account • DEBIT
• CREDIT • By sa sales 10 1000000 •
• To A 35000 • To B 15000 • To B 25000 • To bank material 400000 • To bank wages 100000 • To profit 425000
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Joint bank account • • • •
Debit To A 200000 To B 100000 To sa sales 10 1000000
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• Credit • By joint venture 400000 • By joint venture 100000 • By a 490000 • By B 310000
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JOINT VENTURERS A/C A • DEBIT • To bank : 490000
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• CREDIT • By bank 200000 • By joint venture 35000 • By profit 255000
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JOINT VENTURERS A/C B • To bank : 310000
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• Credit • By bank 100000 • By joint venture 15000 • By joint venture 25000 • By profit 170000
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