-CONSIGNMENT ACCOUNTING-
Introduction
The sales activity of any business can be organized in different ways. With the customers spread all over, the business
entity cannot afford to have only minimum selling points nor can it have its own resources to have the outlets all
over. The business volumes cannot be limited in any case. The core competence of a manufacturing company is to
produce a good quality product. It creates a network of its own outlets, dealers, commission agents, institutions etc
to distribute its products efficiently and effectively. Thus the selling may be handled directly through own salesmen
or indirectly through agents.
In case of direct selling, the company usually has depots all over. The stocks are transferred to these depots and
from there finally sold to ultimate customers. This involves huge expenses and problems of maintaining the same on
a permanent basis. Hence, the firm could appoint agents to whom stocks will be given. These agents distribute the
products to ultimate customers and receive commission from the manufacturer. One such way of indirect selling is
selling through consignment agents. The relationship between consignor and consignee is that of Principal-Agent
relationship.
Difference between Sale and Consignment
1. In sale the property in goods is transferred to the buyer immediately whereas in consignment the property is
transferred to the buyer only when goods are sold by the consignee. The ownership of goods remains with
the consignor when goods are transferred to the consignee by the consignor.
2. In sale, the risk attaching to the goods passes with ownership to the buyer. In case of a consignment, the risk
attaching to the goods does not pass to the consignee who acts as a mere agent. If there is any damage or
loss to the goods it is borne by the consignor provided the consignee has taken reasonable care of the goods
and the damage or loss is not due to his negligence.
3. The relationship of consignor and consignee is that of a principal and an agent as in a contract of agency
whereas the relationship of buyer and seller is governed by the Sale of Goods Act.
4. Unsold goods on consignment are the property of the consignor and may be returned if not saleable in the
market whereas goods sold on sale basis are normally not returnable unless there is some defect in them.
Main Terms of Consignment Trade
Consignor – He is the person who sends goods to agents e.g. a manufacturer or wholesaler.
Consignee – He is the agent to whom goods are sent for selling.
Proforma Invoice – When the consignor sends the goods to the consignee, he prepares only a proforma invoice
and not an invoice. A proforma invoice looks like an invoice but is really not one. The objective of the proforma
invoice is only to convey information to the consignee regarding quantity, varieties and prices of goods sent and
expenses incurred and not to make him liable like a trade debtor.
Over-riding Commission – It is an extra commission allowed over and above the normal commission is generally
offered for the following reasons :
(i) When the agent is required to put in hard work in introducing a new product in the market.
(ii) Where he is entrusted with the work of supervising the performance of other agents in a particular area.
(iii) For effecting sales at prices higher than the price fixed by the consignor.
Ordinary Commission – This is a fee payable by consignor to consignee for sale of goods when the consignee
does not guarantee the collection of money from ultimate customer. The % of such commission is generally lower.
FINANCIAL ACCOUNTING 111
Del Credre Commission – This is additional commission payable to the consignee for taking over additional
responsibility of collecting money from customers. In case, the customers do not pay the consignee takes over the
loss of bad debts in his books. Although it’s paid for taking over risk of bad debts that arise out of credit sales only,
this commission is calculated on total sales and not on credit sales.
Account Sales – This is a periodical statement prepared by consignee to be sent to the consignor giving details of
all sales (cash and credit), expenses incurred and commission due for sales, destroyed-in-transit or in godown and
deducting the amount of advance remitted by him.
Operating Cycle of Consignment Arrangement
(i) Goods are sent by consignor to the consignee.
(ii) Consignee may pay some advance or accept a bill of exchange.
(iii) Consignee will incur expenses for selling the goods.
(iv) Consignee maintains records of all cash and credit sale.
(v) Consignee prepares a summary of results called as Account sales.
(vi) Consignor pays commission to the consignee.
Sometimes, the consignor may send the goods at a price higher than cost so that the consignee gets no knowledge
of the real cost of goods which is confidential for the consignor.
Accounting for Consignment Business
The consignor and consignee keep their own books of accounts. The consignor may send goods to many consignees.
Also, a consignee may act as agent for many consignors. It is appropriate that both of them would want to know
profit or loss made on each consignment. There are certain new accounts that are to be opened in addition to
regular accounts as cash or bank.
The objective of consignor in making accounts relating to consignment is two-fold viz.
(i) To ascertain the results (profit/loss) of consignment and incorporate them in his profit and loss account.
(ii) To make final settlement with the consignee.
To achieve these objectives, he prepares respectively two accounts, viz. ‘Consignment Account’ and ‘Consignee
Account’. The former is a nominal account and latter is a personal account. A separate consignment account
as well as consignee account is prepared in respect of every consignment. It is important to observe that the two
accounts are prepared by the consignor in addition to other accounts in his ledger to incorporate the results of
consignments in his books.
When goods are dispatched on Consignment no entry can be made in the Sales Account as this is not a sale, and,
until the goods are sold, they remain the legal property of the consignor. For the same reason the consignee’s
personal account cannot be debited with the value of the goods consigned. He is not a debtor until the goods
are sold.
As an agent, the consignee is not liable to pay for the goods received on consignment. Therefore, he makes no
entry in his financial books on such receipts. As, however, he is liable to account for the goods received, he keeps as
adequate record in an appropriate memorandum book. Apart from this his only concern is to record the expenses
he has incurred, the sales, his commission and his financial relationship with the consignor. A personal account for
the consignor is the only additional account a consignee needs to record his consignment transactions.
