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Unit 3Consignment Accounting Q1) explain consignment featuresA1) 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.FeaturesTwo Parties: Consignment accounting mainly involves two party’s consignor and consignee. Transfer of Procession: Procession of goods transferred from consignor to consignee. Agreement: For terms and conditions of the consignment there is a pre-agreement between the consignor and consignee. No Transfer of Ownership: Until the consignee sells it the ownership of goods remains in the hands of the consignor. The only procession of goods is transferred to a consignee. Re-Conciliation: Consignor sends Pro-forma invoice while consignee sends account sale details and both reconcile their accounts at the end of the year. Separate Accounting: In the books of consignor and consignee there is independent accounting done of consignment account. Both prepare consignment account and record the journal entries of goods through consignment account only. Q2) explain difference consignment and salesA2)
Q3) explain terms used in consignmentA3) Terms used in consignment accountConsignor: It is the person that sends goods. Consignee: The person who receives the goods is called the consignee. Consignment: Consignment is a business arrangement through which the consignor sends goods to the consignee for sale. Consignment Agreement: It is legally written communication which defines the terms and conditions of the consignment between the consignor and consignee. Pro-Forma Invoice: Pro-forma invoice is the statement forwarded when the consignor sends goods to the consignee, showing details of goods such as quantity, price, etc. Non- Recurring Expenses: Expenses that are incurred by the consignor to dispatch the goods from his place to place of the consignee are called non-recurring expenses. These expenses are added to the cost of goods. Recurring Expenses: The consignee incurs these expenses after the goods reached his place. These expenses are of maintenance of goods type’s expenses. Commission: Commission is the reward for the sale of goods on behalf of the consignor. It is as per the consignment agreement. Account Sale: It is the statement forwarded by the consignee to consignor showing details of goods sold, amounts received, expenses incurred, a commission charged, advance payment and balance due and stock in hand, etc. Q4) explain Recording in the books of Consignor – at costA4) In consignment, the consignor sends goods to the consignee either at cost price or at a higher price known as invoice price. The accounting procedure used under cost price method is a little bit different from that used under invoice price method.Cost price method - Goods sent by consignor on Consignment: Consignment A/c Dr. To Goods sent on Consignment A/c2. Expenses incurred by Consignor:Consignment A/c Dr. To Cash Account.3. Goods sold by Consignee:Consignee A/c Dr. To Consignment Account4. Expenses incurred by the Consignee:Consignment A/c Dr. To Consignee A/c5. Profit on Consignment:Consignment A/c Dr. To Profit and Loss Account6. Loss on Consignment:Profit and Loss A/c Dr. To Consignment A/c Q5) explain Recording in the books of Consignor – at invoiceA5) Invoice price methodWhen a consignor sends goods to consignee at a price higher than the cost price, that is known as invoice price method. It is done if the consignor does not want to disclose the real profit to the consignee. The consignee will not be able to know the cost price if the goods are consigned at above price.1. For goods sent on consignmentConsignment to.................. A/C..........Dr.(invoice price)To goods sent on consignment A/C 2. For loading goods sent on consignmentGoods sent on consignment A/C........Dr.(loading amount)To consignment to......A/C 3. For abnormal lossAbnormal loss A/C...............Dr.(invoice price)To consignment to........A/C 4. For loading on abnormal lossConsignment to......A/C.............Dr.(loading amount)To abnormal loss A/C 5. For unsold stockConsignment stock A/C.............Dr.(invoice price)To consignment to........A/C 6. For loading on unsold stockConsignment to..........A/C.......Dr. (loading amount)To consignment stock reserve A/C 7. For goods return by consigneeGoods sent on consignment A/C.............Dr. (invoice price)To consignment to.....A/C 8. For loading on goods returnedConsignment to.........A/C ........Dr.(loading amount)To goods sent on consignment A/C Q6) explain valuation of unsold stockA6) When all the goods have not been sold, it becomes necessary to value the unsold goods. 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. 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. The following method are considered while valuing unsold stock:Cost Price Of Goods Consigned.................................XXXAdd: Expenses incurred by consignor:Freight.........................................................................XXXCarriage.......................................................................XXXInsurance on goods dispatch......................................XXXDocks dues....................................................................XXXExport/Import duties....................................................XXXLoading and unloading charges...................................XXXAdd: Consignee's expenses:Unloading charges.....................................................XXXLanding charges........................................................XXXImport duty................................................................XXXOctroi.........................................................................XXXGodown rent etc........................................................XXXTotal Cost..................................................................XXXCost of unsold stock = (Total Cost/Total Quantity) X Unsold QuantityAlternative Method,Cost Of Unsold Stock= (Cost of goods sold+Proportionate of all expenses/Total Quantity) X unsold stock Q7) explain Treatment and valuation of abnormal & normal lossA7) Normal Loss − Due to inherent characteristics of goods like evaporation, drying up of goods, etc normal loss may occur. It is included in the cost of goods sold and the closing stock by inflating the rate per unit but not separately shown in the consignment account. Abnormal Loss − An abnormal loss may occur due to any accidental reason. To calculate actual profitability it is credited to the consignment account. Calculation of value of abnormal loss
Amount of abnormal loss credited to consignment account Insurance claim is credited to abnormal loss account Balance of abnormal loss transferred to profit and loss account In case of abnormal loss in transit, the proportionate expenses of consignee are not added. Q8) explain Types of commission paid by the consignor to the consigneeA8) Ordinary commissionThe 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 commissionSpecial commissionIn normal practice, if a consignee sell the goods at the price higher than the normal selling price, he will entitled 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.Del credere commission (with and without bad debt) - use of Consignment Debtors A/C. Del credere commission is related to credit sales. This type of commission which a consignor offers to the consignee who guarantees the collection of payment from credit customers. It acts like a credit insurance to consignor in the case when a customer becomes insolvent or fails to make payment due to some other reason.CalculationDel credere commission is paid to the consignee in addition to his ordinary commission. Del credere commission is computed at a certain pre agreed percentage of total gross sale proceeds. Q9) write Recording in the books of ConsigneeA9) The consignee receives the goods from the Consignor. To the consignee it is an inward consignment. An inward consignment is the receipt of goods by the Consignee from the Consignor for the purpose of sale on commission basis. Consignee is not the owner of the goods.Journal entryWhen the goods is received No entryThe Consignee is not the owner of the goods. He does not purchase the goods. Hence he does not include this in his book. 2. When Expenses are Incurred by the Consignee:Consignor Account Dr. To Bank Account(Being expenses paid on consignment) 3. Advance Remitted to Consignor by Cash/Cheque/Bills Payable:Consignor Account Dr.To Cash/Bank/Bills Payable A/c(Being advance paid to Consignor) 4. When consignee sold the goods(a) For cash sales:Bank Account Dr. To Consignor Account(Being the cash sales of consignment)(b) For credit sale:Consignment Debtors Account Dr. To Consignor Account(Being the credit sales of consignment) 5. When the Commission is Due:Consignor Accounts Dr. To Commission Account(Being commission earned on sale of consignment) 6. When the Consignee Collected the Debt from Consignment Debtors:Bank Account Dr.To Consignment Debtors A/c(Being the Collection of consignment debts) 7. For Bad Debts if Any:(a) If Del Credere Commission is not paid:Consignor Account Dr.To Consignment Debtors A/c(Being bad debt incurred on sales)(b) If Del Credere Commission is paid:Bad Debts Account Dr. To Consignment Debtors A/c(Being bad debts incurred on consignment sales)(c) Bad debts is transferred to his Profit & Loss Account:Del Credere Commission Account Dr. To Bad Debts Account(Being bad debts transferred to Del Credere Commission Account) 8. Closing of Del Credere Commission and Commission Account:Commission Account Dr.Del Credere Commission account Dr.To profit and loss account(Being commission account and balance of del credere account is closed by transferring to profit and loss account) 9. Settlement of account with consignorConsignor account Dr.To cash/ bank/ bills payable account(Being the amount due to consignor is settled) Q10) explain accounting for sale on approvalA10) Goods are sometimes sent to the customers on approval basis. Goods sent on ‘approval’ means goods sent to the customers with the option to the buyer to retain or return the goods within a specified period. The ownership of the goods is passed only when the buyer gives his approval or if the goods are not returned within that specified period . When the Business sends goods casually on Sale or Return: When the transactions are few, the seller treats the transactions as an ordinary sale. If the goods are returned a reverse entry is passed to cancel the previous transaction. If, at the year–end, goods are lying with the customer entry for sales made earlier is cancelled and the value of the goods with the customers treated as closing stock. Journal Entries When goods are sent Sundry Debtors A/c Dr. (Invoice Price or Selling Price) To Sales A/c When goods are returned or rejected Sales A/c Dr. (Invoice Price or Selling Price) To Sundry Debtors A/c When goods are accepted No Entry ( When goods are sent on Sale or Return basis the normal entry for sale has been already recorded , and hence on goods accepted by the Customers again no entry is required to be passed . When unapproved goods are existing on the last day of the year Sales A/c Dr. To Sundry Debtors A/c (Invoice Price or Selling Price) (When the above unapproved goods are returned in future no entry will be passed to record the same)2. Should be included in Closing stock and valued at Cost or Market Value whichever is lower Stock with Customers on sale or Return A/C.-----Dr. To Trading A/CWhen the Business sends goods frequently on Sale or Return Basis :In this method a specially ruled Sale or Return Journal is maintained. Entries for goods sent ,goods returned and goods approved are recorded in the same book. Entry for approved goods is posted to the individual Debtors A/c and the total is posted to the credit of Sales A/c. When the Business sends Goods numerously on sale or return :When transactions are numerous, the seller keeps the following additional booksa) Sale or Return Day Book and b) Sale or Return LedgerThe Ledger contains the accounts of the customers and the ‘Sale or Return’ A/c. Both these books are Memorandum Books The following entries are recorded in the Sale or Return BookWhen goods are sentCustomer A/c Dr. To Sale or Return A/cWhen goods are approved / Returned Sale or Return A/c-------Dr. To Customer A/cWhen the goods are approved entry for the same is made in the Sales Book
CONSIGNMENT | SALE |
Ownership of the goods remains with the consignor. | Ownership of the goods transfer to buyer. |
Consignee can return unsold goods. | Goods sold can be returned only if seller agrees. |
Consignor bears the loss of goods held with consignee. | Buyer have to bear the loss if any after delivery of goods. |
Relationship between CONSIGNOR and CONSIGNEE is that of PRINCIPAL and AGENT. | Relationship between buyer and seller is that of Creditor and Debtor |
Expenses incurred by consignee to keep goods safely are borne by consignor. | Expenses by buyer to keep goods safely is borne by buyer. |
Cost of abnormal loss (net expected selling price if it is less than the cost price) | xxx |
Add: proportionate expenses of consignor (all expenses / net goods spent on consignment *abnormal loss) | xxx |
Add: proportionate expenses of consignee (all expenses incurred by consignee till the goods reach his premise * abnormal loss/ goods received by him) | Xxx |
Value of abnormal loss | Xxx |
Less insurance claim | Xxx |
Net abnormal loss | xxx |
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