ACCOUNTING TREATMENT OF CONSIGNMENT
Consignment is a specialized kind of transaction which involves the two parties i.e. Consignor and Consignee. In this the consignor dispatches the goods to the consignee and consignee is required to sell those goods. For this, the consignee gets a commission. Consignment is a nature of transaction that leads to the expansion of business. The legal relationship between the consignor and consignee is of the agent and the principal. The Accounting Treatment of Consignment is as follows:
IN THE BOOKS OF CONSIGNOR
In order to keep the full record of the various transactions regarding the consignment, the consignor opens the following accounts in his books:
CONSIGNMENT ACCOUNT
- This is a Nominal Account.
- This is prepared to find out the profit or loss of the concern.
- It is named with the consignee or the place.
- All the expenses on the consignment are debited to this account.
CONSIGNEE’S ACCOUNT
- This is the personal account.
- The gross sale proceeds are debited in this account.
- The advance given by consignee is credited in this account.
- An expense incurred by the consignee, commission due to him is credited in this account.
- Balance of this account shows the amount due from the consignor.
GOODS SENT ON CONSIGNMENT ACCOUNT
- It is a real account.
- The goods sent on consignment are credited in this account.
- The goods returned by the consignee are debited in this account.
- This account is closed by transferring the balance amount to either Trading Account or Purchases Account.
STOCK ON CONSIGNMENT ACCOUNT
- This is the real account.
- It records the unsold goods with the consignee at the end of the year.
CONSIGNMENT STOCK RESERVE ACCOUNT
In those cases where the goods, are consigned to consignee at invoice price or ‘cost plus profit basis’ and at the end of the year, a portion of goods remain unsold. This account is opened to adjust the effect of excess of invoice price over the cost price, in order to arrive at true profit.
JOURNAL ENTRIES
There are three methods of accounting for consignment:
COST PRICE METHOD
| Goods sent by consignor on Consignment: Consignment A/c Dr. To Goods sent on Consignment A/c |
| Expenses incurred by Consignor: Consignment A/c Dr. To Cash Account. |
| Goods sold by Consignee: Consignee A/c Dr. To Consignment Account |
| Expenses incurred by the Consignee: Consignment A/c Dr. To Consignee A/c |
| Profit on Consignment: Consignment A/c Dr. To Profit and Loss Account |
| Loss on Consignment: Profit and Loss A/c Dr. To Consignment A/c |
FORMAT OF CONSIGNMENT ACCOUNT
| DATE | PARTICULARS | AMOUNT | DATE | PARTICULARS | AMOUNT |
| To Goods sent on consignment A/c (at cost) To Cash A/c (Expenses of consignor) To Consignee’s A/c (Expenses of consignee) To Consignee’s A/c (Commission of consignee) To Profit and Loss A/c (Profit on consignment) | By Consignee’s A/c (For sales made on consignment) By consignment on stock A/c (with cost or market price- least) By Profit and Loss A/c (for loss on consignment) |
INVOICE PRICE METHOD
In many cases, the consignor makes the invoice at the selling price i.e. Proforma Invoice Price. The idea is that the consignee should not know the actual cost of the goods. In such case, the entries are made by the consignor in his books at the invoice price. But to find out the actual profit or loss, the sale proceeds must be compared with the actual profit.
| When goods are invoiced at cost | When goods are invoiced at loading price | |
| FOR GOODS SENT ON CONSIGNMENT | Consignment A/c Dr. To goods sent on consignment A/c (with cost of goods) | Consignment A/c Dr. To Goods sent on consignment A/c (with invoice price of goods) Goods sent on consignment A/c Dr. To Consignment A/c (with the amount of loading) |
| FOR GOODS RETURNED BY CONSIGNEE | Goods sent on consignment A/c Dr. To Consignment A/c (with cost of goods) | Goods sent on consignment A/c Dr. To Consignment A/c (with cost of goods) Consignment A/c Dr. To goods sent on consignment A/c (with amount of loading) |
| FOR OPENING STOCK | Consignment A/c Dr. To Consignment Stock A/c (with cost price of opening stock) | Consignment A/c Dr. To Consignment Stock A/c (with invoice price of opening stock) Consignment Stock A/c Dr. To Consignment A/c (with amount of loading) |
| FOR CLOSING STOCK | Consignment Stock A/c Dr. To Consignment A/c (with cost price of closing stock) | Consignment A/c Dr. To Consignment Stock A/c (with invoice price of opening stock) Consignment Stock A/c Dr. To Consignment A/c (with amount of loading) |
MEMORANDUM COLUMN METHOD
This method is a mixture of both cost price and invoice price method. Two columns are made to record the cost price and the invoice price of the goods consigned. There is no need for passing the entries for removal of both loading as both invoice and cost values are shown in the separate columns. The cost column shows the profit or loss.
IN THE BOOKS OF CONSIGNEE
The consignee makes the accounts relating to consignment to effect the settlement with the consignor and to recognize his commission entitlement as consignee. To achieve these objectives, he prepares the following two accounts:
CONSIGNOR’ PERSONAL ACCOUNT
- This is personal account.
- A separate consignor account is prepared in respect of every consignment.
- It is debited with the expenses incurred, commission earned by consignee, advance given to the consignor.
- It is credited with the value of goods sold.
- The balance of this account will show the amount due to or due from the consignor.
COMMISSION ACCOUNT
- This account is nominal in nature.
- It is credited with the commission earned by the consignee.
- It is transferred to Profit and Loss Account.
JOURNAL ENTRIES
| Advance sent by consignee to Consignor: Consignor A/c Dr. To Cash/ Bank |
| Goods sold by Consignee: Cash A/c Dr. (on cash basis) Debtor A/c Dr. (on credit basis) To Consignor A/c |
| Expenses incurred by consignee: Consignor A/c Dr. To Cash Account |
| Commission due to consignee: Consignor A/c Dr. To Commission A/c |
| Amount sent by consignee against sale proceeds: Consignor A/c Dr. To Cash A/c |