ISC Accounts Consignment

Rohit Agarwal 9883248954

Chapter 3: Consignment     

Consignment: Consignment means the transaction of sending goods by one person to another, who is to sell those goods, on behalf of the first person. Consignor: The person who sends the goods is known as Consignor. Consignee: The person to whom the goods are sent is known as Consignee. Relationship: The legal relationship between these two persons is that of principal and agent. Outward/ Inward Consignment: The consignment is Outward Consignment for the person who sends the goods for sale and Inward Consignment for the person who receives the goods for sale

Basis Ownership goods.

Relationship

Statue Commission

in

Consignment Ownership of the goods remains with consignor until the goods are actually sold. Consignee acts only as a custodian of goods. The relationship of consignor and consignee is that of principal and agent. Law of agency applies. Consignee is entitled to get commission based on agreement entered with consignor.

Accounts Sales It is prepared and forwarded by consignee to consignor.

Sale Both ownership and possession possession are transferred to the buyer immediately after sale. In case of credit sales, the relationship of seller and buyer is that of creditor and debtor. Sale of Goods Act applies. Seller earns profit at the time of sale. No commission is given to the buyer.

It contains information about goods sold.

Proforma Invoice It is prepared and forwarded by consignor to consignee. It is sent only once, when goods are sent on consignment. It contains information about goods consigned.

Account Sales It is just a statement. It is prepared by consignee. It reflects the balance due to Consignor.

Consignment Account It is a nominal A/c. It is prepared by consignor. It reflects the profit or loss on consignment.

It is sent at periodic intervals.

Proforma Invoice It cannot charge the consignee for value of the goods. It may be prepared at Cost Price or at Invoice Price. Recurring expenses These expenses are incurred again and again. These expenses are incurred by the consignee after the goods reach his godown.

Sales Invoice It charges the buyer with the value of the goods. It is always prepared at selling price. Non-recurring expenses These expenses are not incurred again and again, but once. These expenses are incurred in transferring goods from consignor’s godown to consignee’s godown.

These expenses are not considered in Valuation of These expenses are considered in Valuation of Unsold Stock. Unsold Stock. Stock on Consignment Account It is basically the closing stock in consignment business. It is always shown as debit balance.

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Consignment Stock Reserve Account It is amount of loading on Consignment Stock at the end. It is always shown as credit balance.

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Rohit Agarwal 9883248954 Normal Loss An unavoidable loss, due to inherent features of the goods. For e.g. evaporation, etc. It is treated as a part of cost by inflating the cost per unit. No Journal entry is passed for such loss.

Basis of Distinction

Ordinary Commission

Abnormal Loss An avoidable loss, which occurs due to abnormal factors, like fire, theft, etc. Its value is credited to consignment account, in order to calculate the normal profit/loss. The following entry is passed: ( Refer Refer Entry 12 )

Special Commission Del Credere Commission Overriding Commission

1. When allowed?

It is allowed to all the consignees for all the consignments for selling goods.

It is allowed to the consignee only when he undertakes the risk of bad debts arising out of credit sales.

It is allowed to the consignee to effect sales at a price higher than price fixed by the consignor.

2. Guarantee

In return of this commission, consignee guarantees only the proceeds of cash sales.

In return of this commission, consignee guarantees the proceeds of cash sales and credit sales.

In return of this commission, consignee does not give any guarantee.

3. How to calculate?

It is calculated at an agreed rate on the total sales.

It is calculated at an agreed rate either on the total sales (if no agreement) or credit sales (if agreement provides).

It is calculated on the difference between actual total sales and sales at specified selling price (surplus).

Statement showing Valuation of Unsold Stock

Add:

Particulars Goods Sent on Consignment All expenses incurred by Consignor

Less: Less:

Goods lost in transit Goods still in transit

Add:

Consignee’s Non-recurring expenses

Less:

Abnormal Loss

Less:

Normal Loss Cost of Goods Available for sale Value of Unsold Stock

Units ** ---** ** ** ** ---** ** ** ** ** **

Cost Loading ** ** ** ---** ** ** ** ** ** ** ** ** ---** ** ** ** ** ** ------** ** ** **

Basis of Valuation of Unsold Stock: Stock: Unsold Stock is to be valued at cost price or net realizable value, whichever is lower. Cost means purchase price plus relevant expenses. Net Realizable value means market price of the goods. (Note: Commission to be deducted in calculation of Net realizable value.)

Accounting Entries: In the books of Consignor 1. When goods are sent on consignment: Consignment to ______ A/c Dr. To Goods Sent on Consignment A/c 2. Consignor’s Expenses:

In the books of Consignee No Entry



Rohit Agarwal 9883248954

4. On getting the bills receivable discounted Bank A/c Dr. Discount A/c Dr No Entry To Bills Receivable A/c 5. On receiving the goods returned by consignee Goods Sent on Consignment A/c Dr. No Entry To Consignment to ______ A/c 6. Consignee’s Expenses: Consignment to ______ A/c Dr. Consignor A/c Dr. To Consignee A/c To Bank A/c 7. (a) On Sales being made by consignee: Consignee A/c Dr. Cash/Consignment Debtors A/c Dr. To Consignment to ______ A/c To Consignor A/c 8. On Making Commission due to consignee: Consignment to ______ A/c Dr. Consignor A/c Dr. To Consignee A/c To Commission A/c 9. (a) For Bad debts if DCC is not given to consignee: Consignment to ______ A/c Dr. Consignor A/c Dr. To Consignee A/c To Consignment Debtors A/c 9. (b) For For Bad debts if DCC is given to consignee: Bad Debts A/c Dr. No Entry To Consignment Debtors A/c 10. On receiving remittance from the consignee: Cash/Bank/Bills Receivable A/c Dr. Consignor A/c Dr To Consignee A/c To Cash/Bank/Bills Payable A/c 11. For unsold stock with consignee: Consignment Stock A/c Dr. No Entry To Consignment to ______ A/c 12. For Abnormal Loss of Goods: Abnormal Loss A/c Dr. To Consignment to ______ A/c No Entry Profit & Loss A/c Dr. Insurance Co./Bank A/c Dr. To Abnormal Loss A/c 13. For Closing Consignment A/c by recording Profit or Loss: (a) In case of Profit: Consignment to ______ A/c Dr. To Profit on Consignment A/c No Entry (b) In case of Loss: Loss on Consignment A/c Dr. To Consignment to ______ A/c 14. For closing Goods Sent on Consignment A/c by transferring the balance to Trading A/c: Goods Sent on Consignment A/c Dr. No Entry To Trading A/c



Rohit Agarwal 9883248954 Invoice Price & Loading Sometimes, the consignor does not want to reveal the cost of goods to the consignee and therefore invoices goods at a price which is higher than the cost price. Such price is known as Invoice Price and the difference between Invoice Price & Cost Price is called Loading. When Goods are sent cost plus loading, then some additional entries are required to be passed in the books of consignor, to eliminate loading. Situation 1. To Eliminate loading from goods are sent on consignment: (Refer Entry 1 of previous list) 2. To Eliminate loading from goods returned by consignee: (Refer Entry 5 of previous list) 3. To Eliminate loading from unsold stock with consignee: (Refer Entry 11 of previous list)

Entry Goods Sent on Consignment A/c Dr. To Consignment to ______ A/c Consignment to ______ A/c Dr. To Goods Sent on Consignment A/c Consignment to ______ A/c Dr To Consignment Stock reserve A/c

Write answer of these questions in your copy: 1. 2. 3. 4. 5. 6. 7. 8. 9.

10. 11. 12. 13.

What is Proforma Invoice? Why is it drawn and by whom? [ISC 1993] Why is consignee not treated as a Consignor’s debtor? [ISC 1994] Differentiate between Normal Loss and Abnormal Loss. [ISC 1996] What is abnormal loss in consignment Accounts? [ISC 1997] What is Over-riding Commission and how it is accounted for? [ISC 2000, 07] What is meant by Recurring and Non-recurring Expenses? Give four examples of each. [ISC 1995, 02] What is Del Credere commission? [ISC 1998, 03] Give two differences between Account Sales and Proforma Invoice? [ISC 2004] What entry will you pass for credit sales made by consignee, when: (a) He gets Del Credere commission. [ISC 2004] (b) He does not get Del Credere commission. [ISC 2005] Give two differences between Sales Invoice and Proforma Invoice? What is account Sales? State two ways in which it differs from a consignment account. [ISC 2005] What is Normal Loss? How is it treated in Consignment Accounts? [ISC 2007] How will Discounting Charges in a consignment account be dealt with when a bill of exchange is drawn by the consignor on the consignee as an advance? [ISC 2008]

Student’s Notes

ISC Accounts Consignment

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