CONSIGNMENT ACCOUNTING CONCEPTS AND EXAMPLES
CONSIGNMENT
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.
Features:
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 Pro-forma 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.
Terms used in consignment a/cs
Consignor: 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 between the consignor and consignee, which defines the terms and conditions of the consignment.
Pro-Forma Invoice: When the consignor sends goods to the consignee, he also forwards statements showing details of goods such as quantity, price, etc. and that statement is called the Pro-forma invoice.
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/ consideration 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.
Advantages
Increase in Business Exposure: Due to consignment sales increase, thereby increase in business exposure. It is a cost-effective method to expand the business.
Lower Inventory Cost: Less inventory holding costs for the consignor;
Incentives to Consignee: When consignee sells on behalf of the consignor, the former receives a commission and other incentives.
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.
Disadvantages
Lower Profit Margin: Due to consignment, the consignor has to pay commission to the consignee, thereby resulting in a lower profit margin in the hands of the consignor.
Negligence by Consignee: Consignee’s negligence may create the problem.
Risk of Goods Damaged: There is a high risk of goods damaged at the consignee’s place or during transport, especially perishable goods.
High Charges: Sometimes, there are high maintenance charges of goods to be borne by consignee and high shipping or conveyance charges to be borne by consignor. This is the place of the consignee, and the consignor is far away from each other.
Commission
There are three types of commission payable to consignee on sale of the goods −
Simple Commission − This is usually a fixed percentage on the total sale, calculated as per mutually agreed terms.
Over-riding Commission − In case of an extra-ordinary sale of the goods, some specific amount is payable to consignee in the form of an incentive is called overriding commission. Over-riding commission is also calculated on the total sales.
Del-credere Commission − “An agreement by which an agent or factor, in consideration of an additional premium or commission (called a del credere commission), engages, when he sells goods on credit, to insure, warrant, or guarantee to his principal the solvency of the purchaser, the engagement of the factor being to pay the debt himself if it is not punctually discharged by the buyer when it becomes due.”
Valuation of unsold Consignment :
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.
PRACTICAL QUESTIONS
Question 1.
Question 2.
K of Kolkata sent 200 packets of rice to D of Delhi to be sold on consignment basis.
The cost price of each packet was ₹ 1,000.
K incurred ₹ 1,200 for freight and ₹ 800 for insurance premium.K received an Account Sales from D, which showed that he sold 180 packets @ ₹ 1,400 each
out of which ₹ 5,000 was bad debt.
D paid ₹ 6,000 as clearing charges, ₹ 1,000 for carriage to godown and ₹ 2,000 for godown rent.
D is entitled to get ordinary commission @ 10% and Del-credere commission @ 5% on sale proceeds.
Show Consignment Account and D Account in the book of K.
Question 3.
Mr. Saha of Kolkata sent 2,500 cases of goods on consignment to Mr. Kole of Mumbai,
each case costing ₹ 150. The following expenses were borne by Mr. Saha for sending the goods.
Freight: ₹ 6,000; Carriage ₹ 3,000 and Loading Charges 2,000.
Mr. Kole sold 1,750 cases at ₹ 210 per case and made the following expenses in this connection:
Packing and selling expenses ₹ 1,200; Storage Expenses ₹ 3,400 and clearing charges ₹ 1,700.
In the transit, 125 cases have been lost. Mr. Kole is entitled to a commission of 10% on gross sales.
Show Consignment Account in the books of Mr. Saha.
Question 4.
Tumpa consigned 1,000 kg of rice @ ₹ 20 per kg to Pintu.
She paid freight ₹ 2,500; dock charges ₹ 1,500 and insurance ₹ 1,000.
200 kg of rice was destroyed in transit due to an accident.
An insurance claim of ₹ 3,500 was admitted by the insurance company.
Pintu sold 720 kg rice @ ₹ 30 per kg and incurred clearing charges ₹ 1,800;
Carrying charges ₹ 1,200; Godown Rent ₹ 1,500 and selling expenses ₹ 1,000.
Pintu is to receive an ordinary commission @ 8% on sale.
He could not realize ₹ 2,000 from debtors and it proved bad.
Pintu remits ₹ 10,000 by a bank draft to Tumpa.
Show the Consignment Account in the books of Consignor.
Question 5.
Prepare Consignment Account in the books of M/S Ramakrishna Concern as on 31stDecember, 2015 from the following particulars given below:
On 1.1.2015 M/S Ramkrishan Concern of Kolkata consigned 20,000kgs of a particular variety of goods
to M/S Vasudha of Delhi at a cost of ₹120 per kg and paid ₹ 1,20,000 on insurance and freight.
400 kg of the item was lost-in-transit. M/S Vasudha took delivery of the remaining goods consigned
and paid unloading charges of ₹ 38,000. Printing and Advertisement expenses were ₹ 40,000
and godown rent ₹ 5,000. 450 kg was lost due to leakage in the godown of M/S Vasudha.
(which was considered as normal loss).
16,600 kg of the goods consigned was sold by M/S Vasudha @ ₹ 150 per kg.
Commission @ 10% on sales is payable to M/S Vasudha.
Question 6.
B.K. Traders of Kolkata consigned goods costing ₹ 75,000 to Ramesh trader of Patna.
The invoice was made so as to show a profit of 33 1/3% on cost. B.K. Traders paid ₹900 as carriage and ₹ 1,400 as freight and insurance.
Goods costing ₹ 7,500 were destroyed while in transit and the insurance Company admitted the full
claim.
Ramesh Traders in Patna paid ₹ 600 as carriage and ₹ 800 as godown rent.
Two- third of the goods received by Ramesh Traders were sold by them at invoice price.
Ramesh trader sent a cheque to B.K Traders for the sale proceeds after deducting the expenses
incurred by them and the commission due to them.
Ramesh Trader was entitled to ordinary commission @ 7.5% and del – credere commission @ 2.5% on sales.
Show Consignment Account in the books of B.K. Traders.
Question 7.
Sun of Siliguri consigned goods costing ₹ 90,000 to Moon of Mumbai.
The invoice price was made so as show a profit of 33 1/3% on cost. Sun paid ₹ 600 as carriage and ₹ 2,400 as Freight and Insurance.
Goods costing ₹ 10,000 were destroyed while in transit and the insurance company admitted the
full claim.In Mumbai, Moon paid ₹ 480 as carriage and ₹ 1,200 as godown rent.
Two – third of the goods received by Moon was sold by her at invoice price.
Moon sent a cheque to sun for the sale proceeds after deducting the expenses incurred by her
and the commission due to her – ordinary @ 5% and del- credere @ 2.5%.
Show the Consignment Account and Moon’s Account in Sun’s ledger.
Question 8.
P of Kolkata consigned 5,000 litres of edible oil, costing ₹ 90 per litre, to Q of Patna at an invoice price
of cost plus 33 1/3%. For the purpose, P incurred ₹ 10,000 as freight and ₹ 5,000 as insurance premium.
On receiving the goods, Q accepted a bill of ₹ 2,00,000 for 3 months drawn by P.
P immediately discounted the bill from his banker at a discount charge of 6% p.a.
After receiving the same, Q incurred ₹ 3,000 as unloading charges, ₹ 2000 as godown rent and
₹ 4,000 as selling expenses. 4,200 litres of soil were sold by Q at 25% higher than the invoice price.
200 Litres of oil were accidentally lost against which an insurance claim of ₹ 7,000 was realised.
100 litres of oil were lost due to leakage. Q was entitled to a commission @ 10% up to the invoice price
of the goods sold and an extra commission @ 20% on the selling price above the invoice price.
Out of the sales made by Q, he could not realize ₹ 10,000 from a customer.
Q remitted cash of ₹ 2,25,000 to P at the end.
Prepare the necessary ledger accounts in the books of P.
Question 9.
Goods costing ₹ 1,32,000 were consigned by Girija of Guwahati to Pawan of Patna at a proforma
invoice price of 20% above cost. For the purpose, Girija paid freight and insurance charges of ₹ 4,000.
The consignee was allowed ₹ 2,000 p.a. towards establishment cost and 5% commission on gross
sales. Pawan paid ₹ 1,000 as godown rent for the three months of the consignment business.
3/4 of the goods were sold at 331/3% profit on invoice price, half of which were credit sales.
Balance stock was valued at proforma-invoice price .
Consignee reported that a customer who purchased goods worth ₹ 10,000 was untraceable
and his balance was considered to be unrealised. 1/3rd of the remaining goods were destroyed by fire and the insurance company paid a claim
to the extent of ₹ 8,000. Pawan cleared his dues by sending a bank draft to Girija at the end.
Prepare the necessary ledger accounts in the books of Girija at the end.
Question 10.
On 1.10.2017, Lee of Lucknow sent on consignment to Pee of Patiala 100 boxes of goods
costing ₹1,200 each and incurred ₹ 4,600 as freight, ₹ 300 as cartage and ₹ 600 as insurance in
consigning the goods.
Pee accepted a bill on 12.10.2017 at 3 months for 60% of normal selling price of goods and
Lee discounted the bill on 15.11.2017 at a discount of 12% p.a.
The normal selling price was cost plus 45%. Pee incurred ₹ 1,500 as unloading charges,
₹ 700 as godown rent and ₹ 1,600 as selling expenses.
He was entitled to a commission @ 6% on normal selling price plus 20% of any surplus over
and above the normal selling price.
Pee reported that three-fifth of the goods received had been sold for ₹ 1,16,400 and
10 boxes of goods were damaged on account of bad packing which would be sold only for ₹ 725 per box.
It was found that 10 boxes of goods were still in transit on 31.12.2017 when the accounts
of the consignor were closed. The amount due to Lee was remitted by a bank draft.
Prepare the necessary accounts in the books of Lee.