consignment notes accounts



QUESTION: What do you mean by ‘Stock on consignment’? How will you value it? Illustrate with examples.

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.

STOCK ON CONSIGNMENT: Stock on consignment refers to the quantity of the goods sent by consignor to consignee for the resale purposes. Sometimes it happens that the goods do not reach the consignee, as they are still in transit. Such stock is treated as closing stock in transit. The cost of goods in transit will include the basic cost of goods to the consignor plus proportionate expenses of consignor. Such stock does not includes the part of expenses of consignee.

VALUATION OF STOCK: The value of the closing stock is brought into the books by means of the following journal entry:

Consignment Stock A/c…………………………………….Dr.

               To Consignment Account

The consignment stock is an asset and will be shown in the balance sheet. Next year it will be transferred to the debit side of the consignment account. The principal of valuing stock “Cost price or market price whichever is lower” Applies in this case also. However, cost price means original cost of the unsold stock plus proportionate amount of the expenses which are necessary to put the goods in their present place and condition.

DIRECT EXPENSES IN VALUATION OF STOCK: Direct expenses are those expenses which are incurred for putting the goods in a ‘saleable condition’. Such expenses are incurred on the goods till these reach the godown of the consignee. Direct expenses are recurring in nature. At the time of valuation of unsold stock, such expenses form part of the cost of the stock.

Examples of direct expenses are Loading charges, freight, insurance during transit, unloading charges etc.

INDIRECT EXPENSES IN VALUATION OF STOCK: Indirect expenses are the expenses which are incurred after the goods reach consignee’s godown. These expenses are recurring in nature. Such expenses do not form the part of the stock.

Examples of indirect expenses are Storage charges, godown rent, insurance during storage etc.


Cost of unsold goods
Add: Proportionate non-recurring expenses of consignor {(Non-recurring expenses of consignor/ Total Quantity)*Units of unsold stock} 
Add: Proportionate non-recurring expenses of consignee {(Non-recurring expenses of consignee/ Total Quantity)*Units of unsold stock} 
Value of unsold stock 


Raj of Rajpura consigned 1200 boxes costing ₹9,000 per box to Laxman of Ludhiana. Raj paid freight of ₹15,000 and insurance in transit of ₹3,000. Laxman received the boxes and incurred, Octroi duty ₹5,000 and cartage ₹2,000 up to his godown. Laxman also paid insurance of godown ₹10,000 godown rent ₹5,000. Laxman sold 1,000 boxes at ₹12,000 per box. Laxman is entitled to a commission of 5% of sales. The value of unsold stock will be valued as follows:

Cost price of unsold units (200*9000)18,00,000
Add: Proportionate non-recurring expenses Freight: ₹15,000+ Insurance in transit: 3,000+ Octroi duty: 5,000+ Cartage: 2,000 {(200/1200)*25,000}4,167
Value of the stock18,04,167


Value of the remaining stock is composed of the following:

  1. Proportion of the cost of goods.
  2. Expenses incurred on goods before the occurrence of loss.
  3. Expenses incurred on goods after the loss has occurred.

(Closing Stock/ Total Cost)*(Cost of goods+ expenses before loss)

EXAMPLE: X consigned 100 cycles costing Rs. 150 each to his agent Y. Expenses incurred in sending them were Rs. 1,000. On the way 5 cycles were damaged. Y took the delivery of the rest and  incurred direct expenses of Rs. 285 and indirect expenses of Rs. 150. Calculate the amount of abnormal loss.

Cost Price of 5 damaged cycles @ Rs. 150 each 750
ADD: Proportionate expenses of X (1,000/100)*5 50

Thus, above is the valuation of stock on consignment.

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