Unit 2

Consignment Accounting

Q1) What is Consignment Accounting?

A1) Consignment accounting is a type of business arrangement in which one person send goods to another person for sale on his behalf and the person who sends goods is called consignor and another person who receives the goods is called consignee, where consignee sells the goods on behalf of consignor on consideration of certain percentage on sale.

Q2) What are the features of Consignment Accounting?

A2) The features of Consignment Accounting are-

1. Two Parties: Consignment accounting mainly involves two party’s consignor and consignee.

2. Transfer of Procession: Procession of goods transferred from consignor to consignee.

3. Agreement: There is a pre-agreement between the consignor and consignee for terms and conditions of the consignment.

4. No Transfer of Ownership: The ownership of goods remains in the hands of the consignor until the consignee sells it. The only procession of goods is transferred to a consignee.

5. Re-Conciliation: At the end of the year or periodic intervals consignor sends Proforma invoice while consignee sends account sale details and both reconcile their accounts

6. Separate Accounting: There is independent accounting done of consignment account in the books of consignor and consignee. Both prepare consignment account and record the journal entries of goods through consignment account only.

Q3) What are the advantages of Consignment Accounting?

A3) The advantages of Consignment Accounting are-

1.Increase in Business Exposure: Due to consignment sales increase, thereby increase in business exposure. It is a cost-effective method to expand the business.

2. Lower Inventory Cost: Less inventory holding costs for the consignor;

3. Incentives to Consignee: When consignee sells on behalf of the consignor, the former receives a commission and other incentives.

4. Business Growth: Consignment benefits both consignor and consignee. Consignor gets lower inventory bearing cost, and consignee without investment earns the commission by selling on behalf of the consignor.

Q4) What is the difference between Consignment and Sale?

A4) The difference between Consignment and sale are-

Q5) What are the different types of Commission?

A5) Commission of the consignee is calculated on gross sale made by the consignee. It is a reward to the consignee by the consignor for selling the goods of former. The rate of commission is fixed considering the prevailing market practices and with due agreement between the consignor and consignee. Sometimes goods consigned with insurance coverage may be damaged and the compensation is realized from the insurance company. The compensation received from the insurance company could be treated as sales but no commission is allowed to the consignee on such a realized compensation amount.

Types Of Commission

1. Ordinary Commission/Simple Commission

This type of commission is given to agent as a reward for his services. The commission charged by the consignee on the gross sale proceeds is known as ordinary or simple commission. It is calculated at fixed percentage of total sales.

Commission = Gross sales X Fixed rate percent of commission. Given to agent as a reward for his services.

2. Del-credere

It is given to agent for shifting responsibility of collection and risk too. In case if Del-Credere Commission is given, agent bears the loss of Bad Debts (if any)

This type of commission is an additional commission for an endeavour of magnifying sales in the form of credit. It is calculated at a certain predetermined rate of gross sales.

3. Special/Extra/Over-riding Commission

Given to agent for selling goods over and above a targeted price. This type of commission includes agent to sell at higher selling price.

In normal practice, if a consignee sells the goods at the price higher than the normal selling price, he will entitle a commission for excess amount realized over the normal selling price. The commission provided on the excess amount realized over the normal selling price is known as special commission.

Q6) Give the journal entries in the books of consignor.

A6)

GOODS SENT ON CONSIGNMENT AT INVOICE PRICE

Dr. CONSIGNMENT A/cCr.

Q7) Give the journal entry of Consignee.

A7) GOODS RECEIVED ON CONSIGNMENT.

NO ENTRY

EXPENSE PAID BY CONSIGNOR

NO ENTRY

EXPENSES PAID BY CONSIGNEE.

Consignor A/c.      Dr

   To Cash/Bank A/c.  

CASH SALES MADE BY CONSIGNEE.

Cash/Bank A/c.           Dr

To Consignor A/c.

CREDIT SALES MADE BY CONSIGNEE.

Consignment Debtor A/c.         Dr

 To Consignor A/c.

COLLECTION FROM CONSIGNMENT DEBTOR.

Cash/Bank A/c.       Dr

To Consignment Debtors A/c.

COMMISSION CHARGED.

Consignor A/c.         Dr

To Commission / Del-credere commission A/c

AMOUNT PAID TO CONSIGNOR.

(Advance or final remittance)

Consignor A/c.          Dr

To Cash / Bank / BP A/c

BAD DEBTS

(a)  If Del-Credere Commission is charged

       Del-Credere A/c.           Dr. 

              To Consignment Debtors A/c

(b) If Del-Credere Commission is NOT charged

          Consignor A/c.             Dr.

                    To Consignment Debtors A/c.

Q8) How valuation of Unsold stock and wastage of stock is calculated?

A8) Valuation of unsold stock will be done like a closing stock of a Trading concern and should be valued at the cost or the market price whichever is low. This stock will be valued at − Proportionate cost price and Proportionate direct expenses. Here, proportionate direct expenses mean all expenses incurred by the consignor and the expenses of consignee, which are incurred by him till the goods reach the warehouse.

Where all the goods have not been sold, it becomes necessary to value the unsold goods. The stock lying in the hands of consignee at the end of accounting year is valued at cost or market price whichever is less. If all the goods are not sold by the Consignee within the accounting period, then the unsold stock is brought into account by the Consignor. The cost of unsold stock or closing stock should be valued at cost to the consignor plus proportionate non-recurring expenses incurred by the consignor and consignee. As usual, the unsold stock in the hands of the consignee should be valued on cost price or market price whichever is less. The consignment stock account is an asset and will be shown in the balance sheet.

Calculation of Value of Unsold Stock: It is calculated as follows:

(a) The proportionate Cost Price and

(b) Proportionate direct expenses i.e., the expenses incurred by the Consignor and Consignee till the goods reached the godown of the Consignee.

The following method should be carefully considered while valuing unsold stock:

Cost Price of Goods Consigned……………………………XXX

Add: Expenses incurred by consignor:

• Freight……………………………………………………………….XXX
• Carriage…………………………………………………………….XXX
• Insurance on goods dispatch……………………………….XXX
• Docks dues………………………………………………………….XXX
• Export/Import duties…………………………………………….XXX
• Loading and unloading charges…………………………….XXX

Add: Consignee’s expenses:

• Unloading charges…………………………………………….XXX
• Landing charges……………………………………………….XXX
• Import duty……………………………………………………….XXX
• Octroi……………………………………………………………….XXX
• Godown rent etc……………………………………………….XXX
• Total Cost…………………………………………………………XXX

Cost of unsold stock = (Total Cost/Total Quantity) X Unsold Quantity

Normal waste is absorbed by the cost of the output. Quantity of normal waste, if any, is deducted out of the input quantity to get the output quantity. The realizable value associated with the waste is deducted out of the cost of process to get the cost of output.

Normal waste is absorbed by the cost of the output. Quantity of normal waste, if any, is deducted out of the input quantity to get the output quantity. The realizable value associated with the waste is deducted out of the cost of process to get the cost of output.

Abnormal waste is undesirable waste exceeding the normal loss set aside. The value of an abnormal loss is calculated as in the process account by using the formula for transferring to Profit and Loss account.

Q9) What is Joint venture? What are its characteristics?

A9) A joint venture is usually a temporary partnership without the use of a firm name, limited to carrying out a particular business plan in which the persons concerned agree to contribute capital and to share profits or losses. The parties in a joint venture are known as co-venturers and their liability is limited to the adventure concerned for which they agree to contribute capital and share profits or losses. A joint venture may consist of a joint consignment of goods, speculation in shares, underwriting of shares or debentures, construction of a building, or any similar form of enterprise.

The main features of a joint venture are specifically made clear.

1.     Two or more person are needed.

2.     It is an agreement to execute a particular venture or a project.

3.     The joint venture business may not have a specific name.

4.     It is of temporary nature. So, the agreement regarding the venture automatically stands terminated as soon as the venture is complete.

5.     The co-ventures share profit and loss in an agreed ratio. The profits and losses are to be shared equally if not agreed otherwise.

6.     The co-ventures are free to continue with their own business unless agreed otherwise during the life of joint venture.

Q10) What are the advantages of Joint venture?

A10) The advantages of Joint venture are-

1. Economies of Scale

Joint Venture helps the organizations to scale up with their limited capacity. The strength of one organization can be utilized by the other. This gives the competitive advantage to both the organizations to generate economies of scalability.

2. Access to New Markets and Distribution Networks

When one organization enters into joint venture with another organization, it opens a vast market which has a potential to grow and develop. For example, when an organization of United States of America enters into a joint venture with another organization based at India, then the company of United States has an advantage of accessing vast Indian markets with various variants of paying capacity and diversification of choice.

At the same time, the Indian company has the advantage to access the markets of the United States which is geographically scattered and has good paying capacity where the quality of the product is not compromised. Unique Indian products have big markets across the globe.

3. Innovation

Joint ventures give an added advantage to upgrading the products and services with respect to technology. Marketing can be done with various innovative platforms and technological up gradation helps in making good products at efficient cost. International companies can come up with new ideas and technology to reduce cost and provide better quality products.

4. Low Cost of Production

When two or more companies join hands together, the main motive is to provide the products at a most efficient price. And this can be done when the cost of production can be reduced or cost of services can be managed. A genuine joint venture aims at this only to provide best products and services to its consumers.

5. Brand Name

A separate brand name can be created for the Joint Venture. This helps in giving a distinctive look and recognition to the brand. When two parties enter into a joint venture, then goodwill of one company which is already established in the market can be utilized by another organization for gaining a competitive advantage over other players in the market.

For example, a big brand of Europe enters into a joint venture with an Indian company will give a synergic advantage as the brand is already established across the globe.

6. Access to Technology

Technology is an attractive reason for organizations to enter into a joint venture. Advanced technology with one organization to produce superior quality of products saves a lot of time, energy, and resources. Without the further investment of huge amount again to create a technology which is already in existence, the access to same technology can be done only when companies enter into joint venture and give a competitive advantage.

Q11) State the difference between Partnership and Joint venture.

A11) In joint venture and partnership some business is carried on by two or more persons and the profits are shared by all of them. But there are some basic differences between the two which are given below:

1. A Partnership firm always has a name whereas there is no need of firm's name in joint venture.

2.A partnership firm is of a continuous nature but a joint venture comes to an end as soon as the work is complete.

3.Separate set of books have to be maintained in partnership whereas a joint venture does not need for a separate set of books, the account can be maintained even in one of the co-venturer's books only.

4. No partner can carry on a similar business in a partnership firm but the co-venturers are free to carry on the business of a similar nature in a joint venture.

5.Though the registration of partnership is not compulsory desirable in partnership whereas there no need for registration at all in a joint venture,

6. A minor can also be admitted to the benefits of the firm in a partnership firm whereas a minor cannot be a co-venturer benefits of the firm as he is incompetent to enter into a contract in a joint venture.

Q12) State the difference between Joint venture and consignment.

A12) Consignment and joint venture are in the nature of an agreement between different parties but there are many points of differences between the two. Some of these are given below:

1.Number of co-ventures is usually two but it can also be more than two in a joint venture whereas in consignment, normally two persons are involved, the consignor and the consignee.

2.The relationship between co-venturers is that of partnership. Co-venturers are the owners in a joint venture whereas the relationship between the consignor and the consignee is that of principal and agent in consignment.

3.The relationship comes to an end as the venture is completed in a joint venture whereas the arrangement may continue for a long time in consignment.

4.All the co-venturers contribute funds to a common pool in a joint venture whereas the funds are provided by the consignor in consignment.

5. A joint venture may be for sale of goods or for carrying on any other activity like construction of building, investment in shares etc whereas a consignment is generally connected with sale of movable goods.

6.The profit is shared by all the co-venturers in case of a joint venture whereas in consignment, The profit belongs to the consignor only. The consignee is entitled only to his commission.

7. There is joint ownership in a joint venture whereas the consignor owns the goods in a consignment.

Q13) Give the accounting treatment when one co-venture maintains books of accounts.

A13) In case the business is not very large, only one of the venturers may be entrusted with the task of recording the transactions in his books. In that case all other co-venturers will send their contributions to such venturer and he will open a Joint Venture Account and the personal accounts of other co-venturers in his books.

If the joint venture business is not very large, the task of recording transactions can very well he entrusted to one of the co-venturers. He will prepare a Joint Venture Account and the personal accounts of other co-venturers. The Joint Venture Account is prepared for ascertaining the profit or loss of the joint venture. The personal account of other coventurers is prepared to find out the amount due from them. As stated earlier, each coventurer is also entitled to carry on his own business and these transactions will be in addition to what he records in respect of his own business. The following journal entries are passed in his books before preparing the necessary accounts of the joint venture.

1. When the co-venturers send their contribution:

                                    Cash bank A/c                                                       Dr.

                                        To Co-venturer's Personal A/c

2. When the goods are purchased for the joint venture:

                Joint Venture A/c                                                    Dr.

                       To Cash/Bank A/c

3. When the goods are supplied from his own stock by the co-venturer who is recording the transactions:

                           Joint Venture A/c                                            Dr.

                                       To Purchases A/c

Here we are crediting Purchases Account because he is supplying the goods from his own stock at cost. But if the goods are supplied by him at n price other than the cost price, we shall credit the Sales Account instead of the Purchases Account.

4. When the goods are supplied by other co-venturers:

                                       Joint Venture A/c                                      Dr.

                                              To Co-venturer's Personal A/c

5. When some expenditure is incurred on account of the joint venture:

                                        Joint Venture A/c                            Dr.

                                             To Cash/bank A/c

But, if expenses are paid by a co-venturer other than the one who is recording the transactions, then the entry will be:

Joint Venture A/c                                                     Dr.

       To Co-venturer's Personal A/c

Here we have debited the Joint Venture Account because it is an expenditure on account of the joint venture business.

6. When the co-venturer recording the transactions sells the goods:

a)     For cash sales:

                   Cash/bank A/c                                 Dr.

                             To Joint Venture A/c

b)    For credit sales:

Debtor's Personal A/c                                  Dr.

                    To Joint Venture A/c

7. When cash is received from debtors:

                     Cash/Bank A/c                             Dr.

                         To Debtor's Personal A/c

8. When some cash discount is allowed to the debtor making payment, or some bad Debts are incurred:

Joint Venture A/c                                             Dr. 

To Debtor's Personal A/c

9.When sales are made by other co-venturers:

Co-venturer's Personal A/c                         Dr.

                  To Joint Venture A/c

1.     When some cash or bills receivable are received from other co-venturers on account of sales made by them:

Cash/Bank/Bills Receivable A/c                   Dr.

             To Co-venturer's Personal A/c

2.     When the co-venturers recording the transactions is entitled to some commission or salary:

                               Joint Venture A/c                     Dr.

                                     To Commission/Salary A/c

Joint Venture Account is debited as it is an expenditure related to the joint venture business.

3.     When the unsold stock of joint venture is taken over by the co-venturer recording the transactions:

                      Purchases A/c                             Dr.

                           To Joint Venture A/c

If the unsold stock is taken over by some other co-venturer, the journal entry will b&:

Co-venturer's Personal A/c                              Dr.

                       To Joint Venture A/c

After passing the above entries, the Joint Venture Account is prepared. The balance of this account will show either profit or loss which is to be shared by all the co-venturers in their profit-sharing ratio. This will require the following further entries:

a)     If it shows profit:

Joint Venture A/c                       Dr.

To Profit & Loss A/c (his own share)

To Co-venturers' Personal A/cs (individually for their shares)

b)    If it results in loss:

Profit & Loss A/c                            Dr.

(His own share of loss)

Co-venturers' Personal A/cs              Dr.

(Individually for their shares)

                           To Joint Venture A/c

After closing the Joint Venture Account, we have to find out the amount due to other coventurers. When this amount is sent to them, we record the following entry:

Co-venturers' Personal A/c.                      Dr.

          To Cash/Bank A/c

Q14) Give the accounting treatment when all the co-venture maintains books of accounts.

A14) When all co-venturers are working actively, each one of them shall open a Joint Venture Account and the personal accounts of other coventurers in his books. In such a situation, each co-venturer informs others about the transactions undertaken by him so that they can incorporate them in their books.

Under this system the "Joint Venture Account" is opened and debited with the value of goods bought and expenses incurred. Cash account or the party which has supplied the goods or incurred the expenses will be credited. When the sales proceeds are received, the party receiving it, will debit cash (for Debtors) account and credit the Joint Venture Account. The other parties will debit the recipient party and credit the Joint Venture Account.

Sometimes, a bill of exchange is drawn by one of the parties and is discounted. In such a case the discount on the bill should be charged to Joint Venture Account. Joint Venture Account will now show the profit or loss on trading. Under this system, each (Joint ventures) partner will open two accounts i.e. (i) Joint Venture Account (ii) The account of other parties.

Journal Entries: The following journal entries will be passed

1)     For Investment in Joint Venture Joint Venture A/c                         Dr.

                 To Cash/Good A/c (Being the amount of goods supplied or cash put in for Joint Venture)

2)     As goods are supplied by the Co-venturer or cash is invested in Joint Venture by him

Cash A/c (For cash sent) Dr.

Joint Venture A/c Dr.

                 To Co-venturer A/c (for goods sent) (Being goods supplied or cash invested by the other partner)

3)     For recording sale of joint venture goods

                     Cash A/c                       Dr.

                         To Joint Venture A/c

                    (Being Sale of goods made)

4)     On sale of joint venture goods by the other party

                    Co-Venturer A/c                         Dr.

                         To Joint Venture A/c

                    (Being Joint Venture goods sold by the other partner)

5)     a) For receipt of Bill of Exchange from the other partner

                        Bills receivable A/c                       Dr.

                          To Co-Venturer A/c

                      (Being bill receivable received)

c)     For discounting the bill of exchange

Bank A/c Dr.

Joint Venture A/c                                Dr.

                    To Bills Receivable A/c

                 (Being bill discounted and discounting charges debited to Joint Venture A/c).

6)     Entries in the books of other partner Acceptor's books regarding acceptance of bills of exchange

Co-venturer A/c                                           Dr.

To Bills Payable A/c

(Being acceptance given)

7)     On discounting the bills of exchange by other party i.e. drawer

                  Joint venture A/c                                      Dr.

                    To Co-Venturer A/c

8)     On commission charged under Joint Venture

Joint Venture A/c                                             Dr.

                          To commission A/c

9)     On Commission charged by another partner

                        Joint Venture A/c                                     Dr.

                                 To Co-Venturer A/c (Being Commission on sale effected by other partners)

10) When some products are left unsold and transferred to his own stock.

           Purchase A/c                                                 Dr.

                To Joint Venture A/c

                (Being the unsold goods taken)

11) If the other partner has taken the unsold goods, the entry will be: -

                  The Co-venturer A/c                                 Dr.

                       To Joint Venture A/c

                  (Being the unsold goods taken by the other partner)

12) Now Joint Venture Account will be closed. If it shows profit then the profit will be divided in the agreed ratio. The entry will be

                Joint Venture A/c

                    To P & L A/c (own share)

                    To Co-venturers A/c (their share)

(Being the profit on Joint Venture shared by the parties)

Q15) Give the accounting treatment when joint bank account is maintained.

A15) Sometimes each co-venturer records only such transactions as are directly concerned with him. In that case he cannot work out the profit or loss because his books do not include all transactions of the joint venture. Hence, for calculating the profit or loss of the joint venture, a Memorandum Joint Venture Account has to be prepared by incorporating all transactions related to the joint venture. Thereafter the Joint Venture Account is completed and closed.

In the method discussed above each co-venturer records all transactions relating to the joint venture in the Joint Venture Account opened in his books, But, in the Memorandum Joint Venture Account Method each co-venturer will record only those transactions relating to the joint venture which are directly concerned with him, and not those of others. Under this method each co-venturer opens a Joint Venture Account including the name of the other co-venturer. For example, if A and B are partners in a joint venture, then in the books of A it will be termed as 'Joint Venture with B account' and in the books of B it will be termed its 'Joint Venture with A Account': Each co-venturer will record only such transactions which are actually effected by him. For example, if goods are purchased by A for the joint venture, it will be recorded only by A and not by other co-venturers. Similarly, if goods are sold by B, it will be recorded in the books of B only. This account is in the nature of a personal account and, therefore, will not disclose the profit or loss of the venture. For that purpose. We prepare an additional account called 'Memorandum Joint Venture Account'. This is like Profit and Loss A/c.

Let us say A and B enter into a joint venture and certain transactions have taken place for which the following entries will be passed in each co-venturer's books.

1. A purchases goods for cash: This transaction shall be recorded in the books of A only. The entry will be:

Joint Venture with B A/c                        Dr.

                 To Cash A/c

2. A incurs some expenditure on account of the joint venture:

It shall be recorded in A's books only. The entry will be:

Joint Venture with B A/c                     Dr.

To Cash A/c 

3. B sells goods for cash:

No entry will be made in A's books. But the following entry will be made in B's books:

Cash Account                              Dr.

To Joint Venture with A A/c

4. B sends money to A:

a)     It shall be recorded in B's books as follows:

Joint Venture with A A/c               Dr

            To Cash/Bank A/c

b)    It shall be recorded in A's books as follows:

                 Cash/Bank A/c Dr

               'To Joint Venture with B A/c

As stated earlier, for ascertaining the profit or loss on the joint venture, we prepare a Memorandum Joint Venture Account. This account is prepared exactly on the pattern of Profit & Loss Account. Since this account does not form pan of the double entry system, the word 'Memorandum ' is prefixed.                             

The method of preparing [his account is very simple. It is prepared on the basis of information supplied by all the co-venturers. The debit entries appearing in the personal accounts of all co-venturers are written on the debit side of the Memorandum Account and the entries appearing on the credit side of those accounts are shown on the credit side of the Memorandum Joint Venture Account. However, you should remember that the transactions which do not relate to an item of expense or income are to be excluded from this Memorandum Account. The difference in the totals of the debit side and the credit side represents profit or loss. The profit or loss thus calculated is then shared by the co-venturers in the agreed profit-sharing ratio. Each co-venturer will record only his share of profit or loss. In the event of profit, the entries shall be:

In the books of A

Joint Venture 'with B A/c                     Dr.

                  To Profit & Loss A/c

In the books of B

Joint Venture with A A/c                        Dr.

                   To Profit & Loss A/c

In the event of loss entries shall be reversed as follows:

In the books of A

Profit and Loss A/c                           Dr.

To Joint Venture with B A/c

In the books of B

Profit and Loss A/c                             Dr.

To Joint Venture with A A/c

In the end each venturer balances the 'Joint Venture with .................... Account' in his books and settles the account by paying or receiving cash.

Q16) RAWAL RATAN SINGH of Chittorgarh consigned 1000 units of 100 each to RANI PADMAVATI of SINGHAL. Expense made by RAWAL RATAN SINGH in such consignment are Rs. 20,000.

RANI PADMAVATI paid unloading charges Rs. 5,000 and Rs.2 P.U. Selling expenses.

She sold all the goods at Rs.140 each and deducted 5% as commission and remitted draft for the balance. Prepare Ledger accounts in the books of Consignor.

A16)

Ledger of Rawal Ratan Singh(Consignor)

Dr.CONSIGNMENT A/c     Cr.

Dr.       PADMAVATI   A/c                                                  Cr.

Dr.Goods Sent On Consignment A/cCr.

Q17) On 15 Jan, 2013 J&K Co. Of Mumbai sent to Muku & Co. Of Kolkata 400 bicycle at an invoice price of Rs.100 per bicycle to be sold on commission. Freight and insurance were Rs.600.

Accounts sale was received from consignee as follow: -

15 March - 100 per bicycle were sold @ Rs.145 on which 5%. Commission and Rs.375 for expenses were deducted.

10 April - 150 per bicycle were sold @ Rs.140 on which 5%. Commission and Rs.290 for expenses were deducted.

From the above information prepare Consignment A/c in the books of J&K Co. And close it on 30 April, 2013 keeping in mind that no salves were made afterwards. Also show accounts in the books of Muku & Co.

A17)

Ledger of J&K CO. (Consignor)

Dr.CONSIGNMENT A/cCr.

Dr.MUKU’s A/c (Consignee)Cr.

Dr.Goods sent on Consignment A/cCr.

LEDGER OF MUKU & CO. (Consignee)

Dr.J&K Co. A/cCr.

Dr.COMMISSION A /cCr.

Working note: -

Closing Stock

Cost of Goods Sent.              

Quantity sent    400

Cost of Goods (400 X 100)40,000

Add: - J&K Co. Expense600

b) Total Cost40,600

c) Quantity Sold250

d) Quantity in stock150

e) Closing Stock - Cost

= Total Cost X Quantity in Stock / Quantity Sent

= 40,600 X 150/400

= 15,225

Note: - It is assumed that the consignee's expenses are incurred after the goods have reached their godown and hence not included in valuation of stock.

Q18) On 1st November,2015, A of Calcutta sends goods costing Rs.1,00,000 to B of Delhi on Consignment basis. A paid Rs. 5,000 as freight and Rs. 2,000 as insurance.

On 31st December,2015, an Account Sales was received from B disclosing that the entire quantity of goods were sold for Rs.1,50,000 out of which Rs. 30,000 was sold on credit A customer who purchased goods for Rs. 5,000 failed to pay and the debt proved bad. All other debts were collected by B in full. As per the agreement, B is allowed a commission @ 10% on sales. B sends the amount due to A by cheque.

Prepare necessary Ledger accounts in the books of A & B.

A18)

LEDGER OF A

Dr.CONSIGNMENT A/cCr.

Dr.  B's A/c.Cr.

Dr.                             Goods sent on Consignment A/c.             Cr.

LEDGER OF B

Dr.A's A/c.Cr.

Dr.   CONSIGNMENT DEBTORS A/cCr.

Q19) Refer to question above. Prepare the necessary ledger account, if in the above question the consignee is given a del credere commission of 5% on sales (In addition to ordinary commission)—other things remaining the same.

A19)

LEDGER OF A

Dr.CONSIGNMENT A/c.Cr.

Dr.  B's A/c.Cr.

Dr.Goods sent on Consignment A/cCr.

LEDGER OF B

Dr.A's A/c.Cr.

Dr.           CONSIGNMENT DEBTORS A/cCr.

Dr.              Del Credere Commission A/cCr.

Dr.      COMMISSION A/cCr.

Dr.              PROFIT & LOSS ACCOUNTCr.

Q20) Amit of Mumbai consigned 100 sewing machines to Sanjay of Surat to be sold on his risk. The cost of one machine was Rs.150, but the invoice price was Rs.200. Amit paid freight Rs. 600 and insurance in transit Rs.200

Sanjay sent a draft to Amit for Rs. 10,000 as advance and later sent an account sale showing that 80 machine were sold at Rs.220 each. Expenses incurred by Sanjay were carriage inward Rs. 25, Octroi Rs.75, godown rent Rs.500 and advertisement Rs.300. Sanjay is entitled to a commission of 5% on sales.

Journalise the above transaction in the books of Amit and Sanjay.

A20)

LEDGER OF AMIT

Dr.CONSIGNMENT A/cCr.

Dr.SANJAY A/c.Cr.

Dr.Goods sent on Consignment A/cCr.

LEDGER OF SANJAY

Dr.AMIT A/cCr.

Unit 2

Consignment Accounting

Q1) What is Consignment Accounting?

A1) Consignment accounting is a type of business arrangement in which one person send goods to another person for sale on his behalf and the person who sends goods is called consignor and another person who receives the goods is called consignee, where consignee sells the goods on behalf of consignor on consideration of certain percentage on sale.

Q2) What are the features of Consignment Accounting?

A2) The features of Consignment Accounting are-

1. Two Parties: Consignment accounting mainly involves two party’s consignor and consignee.

2. Transfer of Procession: Procession of goods transferred from consignor to consignee.

3. Agreement: There is a pre-agreement between the consignor and consignee for terms and conditions of the consignment.

4. No Transfer of Ownership: The ownership of goods remains in the hands of the consignor until the consignee sells it. The only procession of goods is transferred to a consignee.

5. Re-Conciliation: At the end of the year or periodic intervals consignor sends Proforma invoice while consignee sends account sale details and both reconcile their accounts

6. Separate Accounting: There is independent accounting done of consignment account in the books of consignor and consignee. Both prepare consignment account and record the journal entries of goods through consignment account only.

Q3) What are the advantages of Consignment Accounting?

A3) The advantages of Consignment Accounting are-

1.Increase in Business Exposure: Due to consignment sales increase, thereby increase in business exposure. It is a cost-effective method to expand the business.

2. Lower Inventory Cost: Less inventory holding costs for the consignor;

3. Incentives to Consignee: When consignee sells on behalf of the consignor, the former receives a commission and other incentives.

4. Business Growth: Consignment benefits both consignor and consignee. Consignor gets lower inventory bearing cost, and consignee without investment earns the commission by selling on behalf of the consignor.

Q4) What is the difference between Consignment and Sale?

A4) The difference between Consignment and sale are-

Q5) What are the different types of Commission?

A5) Commission of the consignee is calculated on gross sale made by the consignee. It is a reward to the consignee by the consignor for selling the goods of former. The rate of commission is fixed considering the prevailing market practices and with due agreement between the consignor and consignee. Sometimes goods consigned with insurance coverage may be damaged and the compensation is realized from the insurance company. The compensation received from the insurance company could be treated as sales but no commission is allowed to the consignee on such a realized compensation amount.

Types Of Commission

1. Ordinary Commission/Simple Commission

This type of commission is given to agent as a reward for his services. The commission charged by the consignee on the gross sale proceeds is known as ordinary or simple commission. It is calculated at fixed percentage of total sales.

Commission = Gross sales X Fixed rate percent of commission. Given to agent as a reward for his services.

2. Del-credere

It is given to agent for shifting responsibility of collection and risk too. In case if Del-Credere Commission is given, agent bears the loss of Bad Debts (if any)

This type of commission is an additional commission for an endeavour of magnifying sales in the form of credit. It is calculated at a certain predetermined rate of gross sales.

3. Special/Extra/Over-riding Commission

Given to agent for selling goods over and above a targeted price. This type of commission includes agent to sell at higher selling price.

In normal practice, if a consignee sells the goods at the price higher than the normal selling price, he will entitle a commission for excess amount realized over the normal selling price. The commission provided on the excess amount realized over the normal selling price is known as special commission.

Q6) Give the journal entries in the books of consignor.

A6)

GOODS SENT ON CONSIGNMENT AT INVOICE PRICE

Dr. CONSIGNMENT A/cCr.

Q7) Give the journal entry of Consignee.

A7) GOODS RECEIVED ON CONSIGNMENT.

NO ENTRY

EXPENSE PAID BY CONSIGNOR

NO ENTRY

EXPENSES PAID BY CONSIGNEE.

Consignor A/c.      Dr

   To Cash/Bank A/c.  

CASH SALES MADE BY CONSIGNEE.

Cash/Bank A/c.           Dr

To Consignor A/c.

CREDIT SALES MADE BY CONSIGNEE.

Consignment Debtor A/c.         Dr

 To Consignor A/c.

COLLECTION FROM CONSIGNMENT DEBTOR.

Cash/Bank A/c.       Dr

To Consignment Debtors A/c.

COMMISSION CHARGED.

Consignor A/c.         Dr

To Commission / Del-credere commission A/c

AMOUNT PAID TO CONSIGNOR.

(Advance or final remittance)

Consignor A/c.          Dr

To Cash / Bank / BP A/c

BAD DEBTS

(a)  If Del-Credere Commission is charged

       Del-Credere A/c.           Dr. 

              To Consignment Debtors A/c

(b) If Del-Credere Commission is NOT charged

          Consignor A/c.             Dr.

                    To Consignment Debtors A/c.

Q8) How valuation of Unsold stock and wastage of stock is calculated?

A8) Valuation of unsold stock will be done like a closing stock of a Trading concern and should be valued at the cost or the market price whichever is low. This stock will be valued at − Proportionate cost price and Proportionate direct expenses. Here, proportionate direct expenses mean all expenses incurred by the consignor and the expenses of consignee, which are incurred by him till the goods reach the warehouse.

Where all the goods have not been sold, it becomes necessary to value the unsold goods. The stock lying in the hands of consignee at the end of accounting year is valued at cost or market price whichever is less. If all the goods are not sold by the Consignee within the accounting period, then the unsold stock is brought into account by the Consignor. The cost of unsold stock or closing stock should be valued at cost to the consignor plus proportionate non-recurring expenses incurred by the consignor and consignee. As usual, the unsold stock in the hands of the consignee should be valued on cost price or market price whichever is less. The consignment stock account is an asset and will be shown in the balance sheet.

Calculation of Value of Unsold Stock: It is calculated as follows:

(a) The proportionate Cost Price and

(b) Proportionate direct expenses i.e., the expenses incurred by the Consignor and Consignee till the goods reached the godown of the Consignee.

The following method should be carefully considered while valuing unsold stock:

Cost Price of Goods Consigned……………………………XXX

Add: Expenses incurred by consignor:

• Freight……………………………………………………………….XXX
• Carriage…………………………………………………………….XXX
• Insurance on goods dispatch……………………………….XXX
• Docks dues………………………………………………………….XXX
• Export/Import duties…………………………………………….XXX
• Loading and unloading charges…………………………….XXX

Add: Consignee’s expenses:

• Unloading charges…………………………………………….XXX
• Landing charges……………………………………………….XXX
• Import duty……………………………………………………….XXX
• Octroi……………………………………………………………….XXX
• Godown rent etc……………………………………………….XXX
• Total Cost…………………………………………………………XXX

Cost of unsold stock = (Total Cost/Total Quantity) X Unsold Quantity

Normal waste is absorbed by the cost of the output. Quantity of normal waste, if any, is deducted out of the input quantity to get the output quantity. The realizable value associated with the waste is deducted out of the cost of process to get the cost of output.

Normal waste is absorbed by the cost of the output. Quantity of normal waste, if any, is deducted out of the input quantity to get the output quantity. The realizable value associated with the waste is deducted out of the cost of process to get the cost of output.

Abnormal waste is undesirable waste exceeding the normal loss set aside. The value of an abnormal loss is calculated as in the process account by using the formula for transferring to Profit and Loss account.

Q9) What is Joint venture? What are its characteristics?

A9) A joint venture is usually a temporary partnership without the use of a firm name, limited to carrying out a particular business plan in which the persons concerned agree to contribute capital and to share profits or losses. The parties in a joint venture are known as co-venturers and their liability is limited to the adventure concerned for which they agree to contribute capital and share profits or losses. A joint venture may consist of a joint consignment of goods, speculation in shares, underwriting of shares or debentures, construction of a building, or any similar form of enterprise.

The main features of a joint venture are specifically made clear.

1.     Two or more person are needed.

2.     It is an agreement to execute a particular venture or a project.

3.     The joint venture business may not have a specific name.

4.     It is of temporary nature. So, the agreement regarding the venture automatically stands terminated as soon as the venture is complete.

5.     The co-ventures share profit and loss in an agreed ratio. The profits and losses are to be shared equally if not agreed otherwise.

6.     The co-ventures are free to continue with their own business unless agreed otherwise during the life of joint venture.

Q10) What are the advantages of Joint venture?

A10) The advantages of Joint venture are-

1. Economies of Scale

Joint Venture helps the organizations to scale up with their limited capacity. The strength of one organization can be utilized by the other. This gives the competitive advantage to both the organizations to generate economies of scalability.

2. Access to New Markets and Distribution Networks

When one organization enters into joint venture with another organization, it opens a vast market which has a potential to grow and develop. For example, when an organization of United States of America enters into a joint venture with another organization based at India, then the company of United States has an advantage of accessing vast Indian markets with various variants of paying capacity and diversification of choice.

At the same time, the Indian company has the advantage to access the markets of the United States which is geographically scattered and has good paying capacity where the quality of the product is not compromised. Unique Indian products have big markets across the globe.

3. Innovation

Joint ventures give an added advantage to upgrading the products and services with respect to technology. Marketing can be done with various innovative platforms and technological up gradation helps in making good products at efficient cost. International companies can come up with new ideas and technology to reduce cost and provide better quality products.

4. Low Cost of Production

When two or more companies join hands together, the main motive is to provide the products at a most efficient price. And this can be done when the cost of production can be reduced or cost of services can be managed. A genuine joint venture aims at this only to provide best products and services to its consumers.

5. Brand Name

A separate brand name can be created for the Joint Venture. This helps in giving a distinctive look and recognition to the brand. When two parties enter into a joint venture, then goodwill of one company which is already established in the market can be utilized by another organization for gaining a competitive advantage over other players in the market.

For example, a big brand of Europe enters into a joint venture with an Indian company will give a synergic advantage as the brand is already established across the globe.

6. Access to Technology

Technology is an attractive reason for organizations to enter into a joint venture. Advanced technology with one organization to produce superior quality of products saves a lot of time, energy, and resources. Without the further investment of huge amount again to create a technology which is already in existence, the access to same technology can be done only when companies enter into joint venture and give a competitive advantage.

Q11) State the difference between Partnership and Joint venture.

A11) In joint venture and partnership some business is carried on by two or more persons and the profits are shared by all of them. But there are some basic differences between the two which are given below:

1. A Partnership firm always has a name whereas there is no need of firm's name in joint venture.

2.A partnership firm is of a continuous nature but a joint venture comes to an end as soon as the work is complete.

3.Separate set of books have to be maintained in partnership whereas a joint venture does not need for a separate set of books, the account can be maintained even in one of the co-venturer's books only.

4. No partner can carry on a similar business in a partnership firm but the co-venturers are free to carry on the business of a similar nature in a joint venture.

5.Though the registration of partnership is not compulsory desirable in partnership whereas there no need for registration at all in a joint venture,

6. A minor can also be admitted to the benefits of the firm in a partnership firm whereas a minor cannot be a co-venturer benefits of the firm as he is incompetent to enter into a contract in a joint venture.

Q12) State the difference between Joint venture and consignment.

A12) Consignment and joint venture are in the nature of an agreement between different parties but there are many points of differences between the two. Some of these are given below:

1.Number of co-ventures is usually two but it can also be more than two in a joint venture whereas in consignment, normally two persons are involved, the consignor and the consignee.

2.The relationship between co-venturers is that of partnership. Co-venturers are the owners in a joint venture whereas the relationship between the consignor and the consignee is that of principal and agent in consignment.

3.The relationship comes to an end as the venture is completed in a joint venture whereas the arrangement may continue for a long time in consignment.

4.All the co-venturers contribute funds to a common pool in a joint venture whereas the funds are provided by the consignor in consignment.

5. A joint venture may be for sale of goods or for carrying on any other activity like construction of building, investment in shares etc whereas a consignment is generally connected with sale of movable goods.

6.The profit is shared by all the co-venturers in case of a joint venture whereas in consignment, The profit belongs to the consignor only. The consignee is entitled only to his commission.

7. There is joint ownership in a joint venture whereas the consignor owns the goods in a consignment.

Q13) Give the accounting treatment when one co-venture maintains books of accounts.

A13) In case the business is not very large, only one of the venturers may be entrusted with the task of recording the transactions in his books. In that case all other co-venturers will send their contributions to such venturer and he will open a Joint Venture Account and the personal accounts of other co-venturers in his books.

If the joint venture business is not very large, the task of recording transactions can very well he entrusted to one of the co-venturers. He will prepare a Joint Venture Account and the personal accounts of other co-venturers. The Joint Venture Account is prepared for ascertaining the profit or loss of the joint venture. The personal account of other coventurers is prepared to find out the amount due from them. As stated earlier, each coventurer is also entitled to carry on his own business and these transactions will be in addition to what he records in respect of his own business. The following journal entries are passed in his books before preparing the necessary accounts of the joint venture.

1. When the co-venturers send their contribution:

                                    Cash bank A/c                                                       Dr.

                                        To Co-venturer's Personal A/c

2. When the goods are purchased for the joint venture:

                Joint Venture A/c                                                    Dr.

                       To Cash/Bank A/c

3. When the goods are supplied from his own stock by the co-venturer who is recording the transactions:

                           Joint Venture A/c                                            Dr.

                                       To Purchases A/c

Here we are crediting Purchases Account because he is supplying the goods from his own stock at cost. But if the goods are supplied by him at n price other than the cost price, we shall credit the Sales Account instead of the Purchases Account.

4. When the goods are supplied by other co-venturers:

                                       Joint Venture A/c                                      Dr.

                                              To Co-venturer's Personal A/c

5. When some expenditure is incurred on account of the joint venture:

                                        Joint Venture A/c                            Dr.

                                             To Cash/bank A/c

But, if expenses are paid by a co-venturer other than the one who is recording the transactions, then the entry will be:

Joint Venture A/c                                                     Dr.

       To Co-venturer's Personal A/c

Here we have debited the Joint Venture Account because it is an expenditure on account of the joint venture business.

6. When the co-venturer recording the transactions sells the goods:

a)     For cash sales:

                   Cash/bank A/c                                 Dr.

                             To Joint Venture A/c

b)    For credit sales:

Debtor's Personal A/c                                  Dr.

                    To Joint Venture A/c

7. When cash is received from debtors:

                     Cash/Bank A/c                             Dr.

                         To Debtor's Personal A/c

8. When some cash discount is allowed to the debtor making payment, or some bad Debts are incurred:

Joint Venture A/c                                             Dr. 

To Debtor's Personal A/c

9.When sales are made by other co-venturers:

Co-venturer's Personal A/c                         Dr.

                  To Joint Venture A/c

1.     When some cash or bills receivable are received from other co-venturers on account of sales made by them:

Cash/Bank/Bills Receivable A/c                   Dr.

             To Co-venturer's Personal A/c

2.     When the co-venturers recording the transactions is entitled to some commission or salary:

                               Joint Venture A/c                     Dr.

                                     To Commission/Salary A/c

Joint Venture Account is debited as it is an expenditure related to the joint venture business.

3.     When the unsold stock of joint venture is taken over by the co-venturer recording the transactions:

                      Purchases A/c                             Dr.

                           To Joint Venture A/c

If the unsold stock is taken over by some other co-venturer, the journal entry will b&:

Co-venturer's Personal A/c                              Dr.

                       To Joint Venture A/c

After passing the above entries, the Joint Venture Account is prepared. The balance of this account will show either profit or loss which is to be shared by all the co-venturers in their profit-sharing ratio. This will require the following further entries:

a)     If it shows profit:

Joint Venture A/c                       Dr.

To Profit & Loss A/c (his own share)

To Co-venturers' Personal A/cs (individually for their shares)

b)    If it results in loss:

Profit & Loss A/c                            Dr.

(His own share of loss)

Co-venturers' Personal A/cs              Dr.

(Individually for their shares)

                           To Joint Venture A/c

After closing the Joint Venture Account, we have to find out the amount due to other coventurers. When this amount is sent to them, we record the following entry:

Co-venturers' Personal A/c.                      Dr.

          To Cash/Bank A/c

Q14) Give the accounting treatment when all the co-venture maintains books of accounts.

A14) When all co-venturers are working actively, each one of them shall open a Joint Venture Account and the personal accounts of other coventurers in his books. In such a situation, each co-venturer informs others about the transactions undertaken by him so that they can incorporate them in their books.

Under this system the "Joint Venture Account" is opened and debited with the value of goods bought and expenses incurred. Cash account or the party which has supplied the goods or incurred the expenses will be credited. When the sales proceeds are received, the party receiving it, will debit cash (for Debtors) account and credit the Joint Venture Account. The other parties will debit the recipient party and credit the Joint Venture Account.

Sometimes, a bill of exchange is drawn by one of the parties and is discounted. In such a case the discount on the bill should be charged to Joint Venture Account. Joint Venture Account will now show the profit or loss on trading. Under this system, each (Joint ventures) partner will open two accounts i.e. (i) Joint Venture Account (ii) The account of other parties.

Journal Entries: The following journal entries will be passed

1)     For Investment in Joint Venture Joint Venture A/c                         Dr.

                 To Cash/Good A/c (Being the amount of goods supplied or cash put in for Joint Venture)

2)     As goods are supplied by the Co-venturer or cash is invested in Joint Venture by him

Cash A/c (For cash sent) Dr.

Joint Venture A/c Dr.

                 To Co-venturer A/c (for goods sent) (Being goods supplied or cash invested by the other partner)

3)     For recording sale of joint venture goods

                     Cash A/c                       Dr.

                         To Joint Venture A/c

                    (Being Sale of goods made)

4)     On sale of joint venture goods by the other party

                    Co-Venturer A/c                         Dr.

                         To Joint Venture A/c

                    (Being Joint Venture goods sold by the other partner)

5)     a) For receipt of Bill of Exchange from the other partner

                        Bills receivable A/c                       Dr.

                          To Co-Venturer A/c

                      (Being bill receivable received)

c)     For discounting the bill of exchange

Bank A/c Dr.

Joint Venture A/c                                Dr.

                    To Bills Receivable A/c

                 (Being bill discounted and discounting charges debited to Joint Venture A/c).

6)     Entries in the books of other partner Acceptor's books regarding acceptance of bills of exchange

Co-venturer A/c                                           Dr.

To Bills Payable A/c

(Being acceptance given)

7)     On discounting the bills of exchange by other party i.e. drawer

                  Joint venture A/c                                      Dr.

                    To Co-Venturer A/c

8)     On commission charged under Joint Venture

Joint Venture A/c                                             Dr.

                          To commission A/c

9)     On Commission charged by another partner

                        Joint Venture A/c                                     Dr.

                                 To Co-Venturer A/c (Being Commission on sale effected by other partners)

10) When some products are left unsold and transferred to his own stock.

           Purchase A/c                                                 Dr.

                To Joint Venture A/c

                (Being the unsold goods taken)

11) If the other partner has taken the unsold goods, the entry will be: -

                  The Co-venturer A/c                                 Dr.

                       To Joint Venture A/c

                  (Being the unsold goods taken by the other partner)

12) Now Joint Venture Account will be closed. If it shows profit then the profit will be divided in the agreed ratio. The entry will be

                Joint Venture A/c

                    To P & L A/c (own share)

                    To Co-venturers A/c (their share)

(Being the profit on Joint Venture shared by the parties)

Q15) Give the accounting treatment when joint bank account is maintained.

A15) Sometimes each co-venturer records only such transactions as are directly concerned with him. In that case he cannot work out the profit or loss because his books do not include all transactions of the joint venture. Hence, for calculating the profit or loss of the joint venture, a Memorandum Joint Venture Account has to be prepared by incorporating all transactions related to the joint venture. Thereafter the Joint Venture Account is completed and closed.

In the method discussed above each co-venturer records all transactions relating to the joint venture in the Joint Venture Account opened in his books, But, in the Memorandum Joint Venture Account Method each co-venturer will record only those transactions relating to the joint venture which are directly concerned with him, and not those of others. Under this method each co-venturer opens a Joint Venture Account including the name of the other co-venturer. For example, if A and B are partners in a joint venture, then in the books of A it will be termed as 'Joint Venture with B account' and in the books of B it will be termed its 'Joint Venture with A Account': Each co-venturer will record only such transactions which are actually effected by him. For example, if goods are purchased by A for the joint venture, it will be recorded only by A and not by other co-venturers. Similarly, if goods are sold by B, it will be recorded in the books of B only. This account is in the nature of a personal account and, therefore, will not disclose the profit or loss of the venture. For that purpose. We prepare an additional account called 'Memorandum Joint Venture Account'. This is like Profit and Loss A/c.

Let us say A and B enter into a joint venture and certain transactions have taken place for which the following entries will be passed in each co-venturer's books.

1. A purchases goods for cash: This transaction shall be recorded in the books of A only. The entry will be:

Joint Venture with B A/c                        Dr.

                 To Cash A/c

2. A incurs some expenditure on account of the joint venture:

It shall be recorded in A's books only. The entry will be:

Joint Venture with B A/c                     Dr.

To Cash A/c 

3. B sells goods for cash:

No entry will be made in A's books. But the following entry will be made in B's books:

Cash Account                              Dr.

To Joint Venture with A A/c

4. B sends money to A:

a)     It shall be recorded in B's books as follows:

Joint Venture with A A/c               Dr

            To Cash/Bank A/c

b)    It shall be recorded in A's books as follows:

                 Cash/Bank A/c Dr

               'To Joint Venture with B A/c

As stated earlier, for ascertaining the profit or loss on the joint venture, we prepare a Memorandum Joint Venture Account. This account is prepared exactly on the pattern of Profit & Loss Account. Since this account does not form pan of the double entry system, the word 'Memorandum ' is prefixed.                             

The method of preparing [his account is very simple. It is prepared on the basis of information supplied by all the co-venturers. The debit entries appearing in the personal accounts of all co-venturers are written on the debit side of the Memorandum Account and the entries appearing on the credit side of those accounts are shown on the credit side of the Memorandum Joint Venture Account. However, you should remember that the transactions which do not relate to an item of expense or income are to be excluded from this Memorandum Account. The difference in the totals of the debit side and the credit side represents profit or loss. The profit or loss thus calculated is then shared by the co-venturers in the agreed profit-sharing ratio. Each co-venturer will record only his share of profit or loss. In the event of profit, the entries shall be:

In the books of A

Joint Venture 'with B A/c                     Dr.

                  To Profit & Loss A/c

In the books of B

Joint Venture with A A/c                        Dr.

                   To Profit & Loss A/c

In the event of loss entries shall be reversed as follows:

In the books of A

Profit and Loss A/c                           Dr.

To Joint Venture with B A/c

In the books of B

Profit and Loss A/c                             Dr.

To Joint Venture with A A/c

In the end each venturer balances the 'Joint Venture with .................... Account' in his books and settles the account by paying or receiving cash.

Q16) RAWAL RATAN SINGH of Chittorgarh consigned 1000 units of 100 each to RANI PADMAVATI of SINGHAL. Expense made by RAWAL RATAN SINGH in such consignment are Rs. 20,000.

RANI PADMAVATI paid unloading charges Rs. 5,000 and Rs.2 P.U. Selling expenses.

She sold all the goods at Rs.140 each and deducted 5% as commission and remitted draft for the balance. Prepare Ledger accounts in the books of Consignor.

A16)

Ledger of Rawal Ratan Singh(Consignor)

Dr.CONSIGNMENT A/c     Cr.

Dr.       PADMAVATI   A/c                                                  Cr.

Dr.Goods Sent On Consignment A/cCr.

Q17) On 15 Jan, 2013 J&K Co. Of Mumbai sent to Muku & Co. Of Kolkata 400 bicycle at an invoice price of Rs.100 per bicycle to be sold on commission. Freight and insurance were Rs.600.

Accounts sale was received from consignee as follow: -

15 March - 100 per bicycle were sold @ Rs.145 on which 5%. Commission and Rs.375 for expenses were deducted.

10 April - 150 per bicycle were sold @ Rs.140 on which 5%. Commission and Rs.290 for expenses were deducted.

From the above information prepare Consignment A/c in the books of J&K Co. And close it on 30 April, 2013 keeping in mind that no salves were made afterwards. Also show accounts in the books of Muku & Co.

A17)

Ledger of J&K CO. (Consignor)

Dr.CONSIGNMENT A/cCr.

Dr.MUKU’s A/c (Consignee)Cr.

Dr.Goods sent on Consignment A/cCr.

LEDGER OF MUKU & CO. (Consignee)

Dr.J&K Co. A/cCr.

Dr.COMMISSION A /cCr.

Working note: -

Closing Stock

Cost of Goods Sent.              

Quantity sent    400

Cost of Goods (400 X 100)40,000

Add: - J&K Co. Expense600

b) Total Cost40,600

c) Quantity Sold250

d) Quantity in stock150

e) Closing Stock - Cost

= Total Cost X Quantity in Stock / Quantity Sent

= 40,600 X 150/400

= 15,225

Note: - It is assumed that the consignee's expenses are incurred after the goods have reached their godown and hence not included in valuation of stock.

Q18) On 1st November,2015, A of Calcutta sends goods costing Rs.1,00,000 to B of Delhi on Consignment basis. A paid Rs. 5,000 as freight and Rs. 2,000 as insurance.

On 31st December,2015, an Account Sales was received from B disclosing that the entire quantity of goods were sold for Rs.1,50,000 out of which Rs. 30,000 was sold on credit A customer who purchased goods for Rs. 5,000 failed to pay and the debt proved bad. All other debts were collected by B in full. As per the agreement, B is allowed a commission @ 10% on sales. B sends the amount due to A by cheque.

Prepare necessary Ledger accounts in the books of A & B.

A18)

LEDGER OF A

Dr.CONSIGNMENT A/cCr.

Dr.  B's A/c.Cr.

Dr.                             Goods sent on Consignment A/c.             Cr.

LEDGER OF B

Dr.A's A/c.Cr.

Dr.   CONSIGNMENT DEBTORS A/cCr.

Q19) Refer to question above. Prepare the necessary ledger account, if in the above question the consignee is given a del credere commission of 5% on sales (In addition to ordinary commission)—other things remaining the same.

A19)

LEDGER OF A

Dr.CONSIGNMENT A/c.Cr.

Dr.  B's A/c.Cr.

Dr.Goods sent on Consignment A/cCr.

LEDGER OF B

Dr.A's A/c.Cr.

Dr.           CONSIGNMENT DEBTORS A/cCr.

Dr.              Del Credere Commission A/cCr.

Dr.      COMMISSION A/cCr.

Dr.              PROFIT & LOSS ACCOUNTCr.

Q20) Amit of Mumbai consigned 100 sewing machines to Sanjay of Surat to be sold on his risk. The cost of one machine was Rs.150, but the invoice price was Rs.200. Amit paid freight Rs. 600 and insurance in transit Rs.200

Sanjay sent a draft to Amit for Rs. 10,000 as advance and later sent an account sale showing that 80 machine were sold at Rs.220 each. Expenses incurred by Sanjay were carriage inward Rs. 25, Octroi Rs.75, godown rent Rs.500 and advertisement Rs.300. Sanjay is entitled to a commission of 5% on sales.

Journalise the above transaction in the books of Amit and Sanjay.

A20)

LEDGER OF AMIT

Dr.CONSIGNMENT A/cCr.

Dr.SANJAY A/c.Cr.

Dr.Goods sent on Consignment A/cCr.

LEDGER OF SANJAY

Dr.AMIT A/cCr.

Unit 2

Consignment Accounting

Q1) What is Consignment Accounting?

A1) Consignment accounting is a type of business arrangement in which one person send goods to another person for sale on his behalf and the person who sends goods is called consignor and another person who receives the goods is called consignee, where consignee sells the goods on behalf of consignor on consideration of certain percentage on sale.

Q2) What are the features of Consignment Accounting?

A2) The features of Consignment Accounting are-

1. Two Parties: Consignment accounting mainly involves two party’s consignor and consignee.

2. Transfer of Procession: Procession of goods transferred from consignor to consignee.

3. Agreement: There is a pre-agreement between the consignor and consignee for terms and conditions of the consignment.

4. No Transfer of Ownership: The ownership of goods remains in the hands of the consignor until the consignee sells it. The only procession of goods is transferred to a consignee.

5. Re-Conciliation: At the end of the year or periodic intervals consignor sends Proforma invoice while consignee sends account sale details and both reconcile their accounts

6. Separate Accounting: There is independent accounting done of consignment account in the books of consignor and consignee. Both prepare consignment account and record the journal entries of goods through consignment account only.

Q3) What are the advantages of Consignment Accounting?

A3) The advantages of Consignment Accounting are-

1.Increase in Business Exposure: Due to consignment sales increase, thereby increase in business exposure. It is a cost-effective method to expand the business.

2. Lower Inventory Cost: Less inventory holding costs for the consignor;

3. Incentives to Consignee: When consignee sells on behalf of the consignor, the former receives a commission and other incentives.

4. Business Growth: Consignment benefits both consignor and consignee. Consignor gets lower inventory bearing cost, and consignee without investment earns the commission by selling on behalf of the consignor.

Q4) What is the difference between Consignment and Sale?

A4) The difference between Consignment and sale are-

Q5) What are the different types of Commission?

A5) Commission of the consignee is calculated on gross sale made by the consignee. It is a reward to the consignee by the consignor for selling the goods of former. The rate of commission is fixed considering the prevailing market practices and with due agreement between the consignor and consignee. Sometimes goods consigned with insurance coverage may be damaged and the compensation is realized from the insurance company. The compensation received from the insurance company could be treated as sales but no commission is allowed to the consignee on such a realized compensation amount.

Types Of Commission

1. Ordinary Commission/Simple Commission

This type of commission is given to agent as a reward for his services. The commission charged by the consignee on the gross sale proceeds is known as ordinary or simple commission. It is calculated at fixed percentage of total sales.

Commission = Gross sales X Fixed rate percent of commission. Given to agent as a reward for his services.

2. Del-credere

It is given to agent for shifting responsibility of collection and risk too. In case if Del-Credere Commission is given, agent bears the loss of Bad Debts (if any)

This type of commission is an additional commission for an endeavour of magnifying sales in the form of credit. It is calculated at a certain predetermined rate of gross sales.

3. Special/Extra/Over-riding Commission

Given to agent for selling goods over and above a targeted price. This type of commission includes agent to sell at higher selling price.

In normal practice, if a consignee sells the goods at the price higher than the normal selling price, he will entitle a commission for excess amount realized over the normal selling price. The commission provided on the excess amount realized over the normal selling price is known as special commission.

Q6) Give the journal entries in the books of consignor.

A6)

GOODS SENT ON CONSIGNMENT AT INVOICE PRICE

Dr. CONSIGNMENT A/cCr.

Q7) Give the journal entry of Consignee.

A7) GOODS RECEIVED ON CONSIGNMENT.

NO ENTRY

EXPENSE PAID BY CONSIGNOR

NO ENTRY

EXPENSES PAID BY CONSIGNEE.

Consignor A/c.      Dr

   To Cash/Bank A/c.  

CASH SALES MADE BY CONSIGNEE.

Cash/Bank A/c.           Dr

To Consignor A/c.

CREDIT SALES MADE BY CONSIGNEE.

Consignment Debtor A/c.         Dr

 To Consignor A/c.

COLLECTION FROM CONSIGNMENT DEBTOR.

Cash/Bank A/c.       Dr

To Consignment Debtors A/c.

COMMISSION CHARGED.

Consignor A/c.         Dr

To Commission / Del-credere commission A/c

AMOUNT PAID TO CONSIGNOR.

(Advance or final remittance)

Consignor A/c.          Dr

To Cash / Bank / BP A/c

BAD DEBTS

(a)  If Del-Credere Commission is charged

       Del-Credere A/c.           Dr. 

              To Consignment Debtors A/c

(b) If Del-Credere Commission is NOT charged

          Consignor A/c.             Dr.

                    To Consignment Debtors A/c.

Q8) How valuation of Unsold stock and wastage of stock is calculated?

A8) Valuation of unsold stock will be done like a closing stock of a Trading concern and should be valued at the cost or the market price whichever is low. This stock will be valued at − Proportionate cost price and Proportionate direct expenses. Here, proportionate direct expenses mean all expenses incurred by the consignor and the expenses of consignee, which are incurred by him till the goods reach the warehouse.

Where all the goods have not been sold, it becomes necessary to value the unsold goods. The stock lying in the hands of consignee at the end of accounting year is valued at cost or market price whichever is less. If all the goods are not sold by the Consignee within the accounting period, then the unsold stock is brought into account by the Consignor. The cost of unsold stock or closing stock should be valued at cost to the consignor plus proportionate non-recurring expenses incurred by the consignor and consignee. As usual, the unsold stock in the hands of the consignee should be valued on cost price or market price whichever is less. The consignment stock account is an asset and will be shown in the balance sheet.

Calculation of Value of Unsold Stock: It is calculated as follows:

(a) The proportionate Cost Price and

(b) Proportionate direct expenses i.e., the expenses incurred by the Consignor and Consignee till the goods reached the godown of the Consignee.

The following method should be carefully considered while valuing unsold stock:

Cost Price of Goods Consigned……………………………XXX

Add: Expenses incurred by consignor:

• Freight……………………………………………………………….XXX
• Carriage…………………………………………………………….XXX
• Insurance on goods dispatch……………………………….XXX
• Docks dues………………………………………………………….XXX
• Export/Import duties…………………………………………….XXX
• Loading and unloading charges…………………………….XXX

Add: Consignee’s expenses:

• Unloading charges…………………………………………….XXX
• Landing charges……………………………………………….XXX
• Import duty……………………………………………………….XXX
• Octroi……………………………………………………………….XXX
• Godown rent etc……………………………………………….XXX
• Total Cost…………………………………………………………XXX

Cost of unsold stock = (Total Cost/Total Quantity) X Unsold Quantity

Normal waste is absorbed by the cost of the output. Quantity of normal waste, if any, is deducted out of the input quantity to get the output quantity. The realizable value associated with the waste is deducted out of the cost of process to get the cost of output.

Normal waste is absorbed by the cost of the output. Quantity of normal waste, if any, is deducted out of the input quantity to get the output quantity. The realizable value associated with the waste is deducted out of the cost of process to get the cost of output.

Abnormal waste is undesirable waste exceeding the normal loss set aside. The value of an abnormal loss is calculated as in the process account by using the formula for transferring to Profit and Loss account.

Q9) What is Joint venture? What are its characteristics?

A9) A joint venture is usually a temporary partnership without the use of a firm name, limited to carrying out a particular business plan in which the persons concerned agree to contribute capital and to share profits or losses. The parties in a joint venture are known as co-venturers and their liability is limited to the adventure concerned for which they agree to contribute capital and share profits or losses. A joint venture may consist of a joint consignment of goods, speculation in shares, underwriting of shares or debentures, construction of a building, or any similar form of enterprise.

The main features of a joint venture are specifically made clear.

1.     Two or more person are needed.

2.     It is an agreement to execute a particular venture or a project.

3.     The joint venture business may not have a specific name.

4.     It is of temporary nature. So, the agreement regarding the venture automatically stands terminated as soon as the venture is complete.

5.     The co-ventures share profit and loss in an agreed ratio. The profits and losses are to be shared equally if not agreed otherwise.

6.     The co-ventures are free to continue with their own business unless agreed otherwise during the life of joint venture.

Q10) What are the advantages of Joint venture?

A10) The advantages of Joint venture are-

1. Economies of Scale

Joint Venture helps the organizations to scale up with their limited capacity. The strength of one organization can be utilized by the other. This gives the competitive advantage to both the organizations to generate economies of scalability.

2. Access to New Markets and Distribution Networks

When one organization enters into joint venture with another organization, it opens a vast market which has a potential to grow and develop. For example, when an organization of United States of America enters into a joint venture with another organization based at India, then the company of United States has an advantage of accessing vast Indian markets with various variants of paying capacity and diversification of choice.

At the same time, the Indian company has the advantage to access the markets of the United States which is geographically scattered and has good paying capacity where the quality of the product is not compromised. Unique Indian products have big markets across the globe.