Financial Accounting - Consignment Accounts

 

FINANCIAL ACCOUNTING

Consignment Accounts

Part A: Discussion of basic theories including various journal entries and computation tables

Part B: 9 Illustrations with solutions

Part A

Introduction

Consignment is a form of business where two parties are involved, one being known as consignor and the other consignee. Consignor and consignee may be located in the same state at different districts, or in the same country at different states, or at different countries. Consignor is the person/party who sends goods to the consignee to be sold by the consignee on behalf of the consignor. Consignee is the person/party who sells goods on behalf of the consignor. Consignor is known as principal and consignee is known as agent of the consignor. In other words, the relationship between the consignor and the consignee is that of a principal and an agent. Whatever profit is made by the consignee is actually the profit of the consignor. Consignee acts as an agent of the consignor to sell the goods, sent on consignment basis, against a commission usually calculated as a percentage of sales. This is the reason why consignee is also sometimes called as commission agent of consignor.

 

When consignor sends goods to the consignee he also sends a document called Proforma Invoice along with the goods. Following are the items of information details included in a Proforma Invoice:

1.             Name and address of the consignor.

2.             Name and address of the consignee.

3.             Name and address of the transporter/carrier.

4.             List of items of goods being consigned and their technical specifications in terms of weight, length, diameter, size, etc.

5.             Prices of the items of goods consigned. (Consignor may send the goods to consignee either at cost price or at invoice price.)

6.             Date of despatch of goods consigned.

7.             Details of payment terms, etc.

 

When consignee remits the collection from sales on consignment basis to the consignor he also sends a document called Account Sales along with the remittance. The information details included in the Account Sales are as follows:

1.             List of items of goods sold along with the respective quantities sold.

2.             Prices at which the goods were sold.

3.             Final amount remitted to the consignor after deducting the following (giving details of each of these deductions):

(a)           Consignee’s expenses,

(b)           Consignee’s commission,

(c)           Any advance remitted earlier by the consignee to the consignor.

 

Books of accounts of consignor

– Cost price method

Following accounts are opened and maintained in the books of the consignor in regard to the consignment business:

1.             Consignment to (name of consignee or place of consignee) account,

2.             Consignee’s personal account,

3.             Goods sent on consignment account.

 

JOURNAL ENTRIES

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	Consignment A/c	Dr
	To Goods sent on consignment
	(Goods sent to consignee)
2	Consignment A/c	Dr
	To Cash/Bank/Creditors
	(Expenses incurred by the consignor)
3	Cash/Bank A/c	Dr
	Bills receivable A/c	Dr
	To Consignee A/c
	(Advance from the consignee received)
4	Consignee A/c	Dr
	To Consignment A/c
	(Goods sold by the consignee)
5	Consignment A/c	Dr
	To Consignee A/c
	(Expenses incurred by the consignee)
6	Consignment A/c	Dr
	To Consignee A/c
	(Commission payable to consignee)
7	Cash/Bank A/c	Dr
	To Consignee A/c
	(Remittance received from the consignee)
8	Stock on consignment A/c	Dr
	To Consignment A/c
	(Closing stock on consignment)
9	Consignment A/c	Dr
	To Profit and loss A/c
	(Profit on consignment transferred to P/L A/c)
10	Profit and loss A/c	Dr
	To Consignment A/c
	(Loss on consignment transferred to P/L A/c)
11	Goods sent on consignment A/c	Dr
	To Trading A/c
	(Goods sent on consignment A/c closed by transfer to Trading A/c, consignor being a manufacturer)
12	Goods sent on consignment A/c	Dr
	To Purchase A/c
	(Goods sent on consignment A/c closed by transfer to Purchase A/c, consignor being a wholesaler)

 

ABNORMAL LOSS AND NORMAL LOSS

Abnormal losses are the losses which could be avoided or reduced by proper management whereas normal losses are the losses which are unavoidable. Examples of abnormal losses are: losses due to theft, fire, etc. Examples of normal losses are: losses due to leakage, evaporation, breakage, shrinkage, etc. Normal losses are ignored in the books of accounts so far as their valuation and recording are concerned whereas abnormal losses should be charged to the profit and loss account and the consignment account should be given due credit for the value of goods lost abnormally.

 

JOURNAL ENTRIES FOR ABNORMAL LOSSES

 

Method: I (without opening abnormal loss account)

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	Profit and loss A/c	Dr
	To Consignment A/c
	(Value of abnormal loss, after adjusting any insurance claim received or accepted by the insurance company, transferred to P/L A/c)
2	Bank/Insurance claim A/c	Dr
	To Consignment A/c
	(Insurance claim received or accepted by the insurance company)

 

Method: II (with abnormal loss account)

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	Abnormal loss A/c	Dr
	To Consignment A/c
	(Full value of abnormal loss credited to the consignment account)
2	Bank/Insurance claim A/c	Dr
	To Abnormal loss A/c
	(Insurance claim received or accepted by the insurance company)
3	Profit and loss A/c	Dr
	To Abnormal loss A/c
	(Net value of abnormal loss, after adjusting the insurance claim received or accepted by the insurance company, transferred to P/L A/c)

 

VALUATION OF ABNORMAL LOSS

AND CLOSING STOCK ON CONSIGNMENT

Valuation of abnormal loss and closing stock

Particulars	Quantity	Value (Rs)
Goods sent on consignment	×××	×××
ADD: Consignor’s expenses		×××
	×××	×××
LESS: Abnormal loss in transit	×××	×××
	×××	×××
LESS: Normal loss	×××
	×××	×××
ADD: Consignee’s non-recurring direct expenses		×××
Goods available for sale	×××	×××
Closing stock	×××	×××

 

Important notes:

1.    Expenses incurred for sending the goods up to the consignee’s place are known as non-recurring expenses and should be considered and included for the valuation of stock on consignment. Examples of non-recurring expenses are:

(a)     Freight and carriage for carrying the goods from consignor’s godown to consignee’s godown;

(b)     Export or import duties with respect to the goods sent on consignment;

(c)     Insurance premium with respect to the goods sent on consignment;

(d)     Loading and unloading charges with respect to the goods sent on consignment.

2.    Expenses incurred after the goods have reached the consignee’s place are known as recurring expenses and should be ignored for the valuation of stock on consignment. Examples of recurring expenses are:

(a)     Godown rent at consignee’s place;

(b)     Carriage on sales incurred by the consignee;

(c)     Insurance premium for godown at consignee’s place;

(d)     Establishment expenses incurred by the consignee.

3.             If the abnormal loss occurs after the goods have reached the consignee’s place, the value of such abnormal loss should include proportionate consignee’s non-recurring expenses.

4.             If there are any goods in transit at the time of settlement of accounts and valuation of stock on consignment, such goods in transit should be valued in the same way as the abnormal loss in transit is valued.

5.             Stock on consignment should be valued at cost (as calculated above) or net realisable value, whichever is lower. Net realisable value in this case can be calculated as follows:

 

	Rs
Expected sale value of the stock at expected market price	×××
LESS: Consignee’s commission on the expected sale value of the stock	×××
LESS: All other possible relevant selling expenses	×××
NET REALISABLE VALUE (NRV)	×××

 

6.             Journal entries for abnormal losses are made only in the books of consignor.

 

CONSIGNEE’S COMMISSION

Consignee’s commission may be of three types:

1.             Ordinary commission,

2.             Del credere commission,

3.             Overriding commission.

 

Both ordinary and del-credere commission are calculated at the given respective percentages on the total sales, including any credit sales, made by the consignee. However, there may be a separate agreement between the consignor and the consignee for calculating the del-credere commission in a way which may be different from the way ordinary commission is calculated. Accordingly, if specifically mentioned in the problem, del-credere commission may be calculated as a percentage of only the credit sales made by the consignee.

 

Del credere commission is an additional commission paid to a consignee who guarantees the payment in case of credit sales. It may or may not be allowed as per the agreement between the consignor and the consignee. If del-credere commission is not allowed to consignee, any loss due to bad debt out of any credit sales will be borne by the consignor. On the other hand, if del-credere commission is allowed to the consignee, the loss due to bad debt out of any credit sales will be borne by the consignee.

 

Overriding commission is an extra commission which, in addition to the ordinary commission and del-credere commission, is allowed by the consignor to the consignee. This commission is normally granted in case the sales by the consignee exceed a specified amount. It can also be granted to the consignee as an incentive for creating market for a new product. Overriding commission will be calculated as per the instruction given in the problem.

 

JOURNAL ENTRIES FOR

ORDINARY AND DEL CREDERE COMMISSION

 

A. If del-credere commission is allowed to consignee

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	Consignee A/c	Dr
	To Consignment A/c
	(Goods sold on credit by the consignee)
2	Consignment A/c	Dr
	To Consignee A/c
	(Commission, including del credere commission, payable to the consignee)
3	NO ENTRY IS REQUIRED TO BE MADE FOR BAD DEBTS IN THE BOOKS OF CONSIGNOR

 

B. If del-credere commission is not allowed to consignee

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	Consignment debtors A/c	Dr
	To Consignment A/c
	(Goods sold on credit by the consignee)
2	Consignment A/c	Dr
	To Consignee A/c
	(Commission payable to consignee, excluding del credere commission)
3	Bad debt A/c	Dr
	To Consignment debtors
	(Bad debt out of credit sales by the consignee)
4	Cash / Bank A/c	Dr
	To Consignment debtors
	(Amount collected from consignment debtors by the consignor)
5	Consignee A/c	Dr
	To Consignment debtors
	(Amount collected from consignment debtors by the consignee)
6	Consignment to A/c	Dr
	To Bad debt A/c
	(Bad debt transferred to Consignment A/c)

 

Alternative short cut method of accounting w.r.t. Del credere commission:

1. If Del credere commission is given to the consignee, any loss due to the bad debts is to be borne by the consignee. In this case, journal entry in the books of consignor:

a)          For credit sales - debit consignee a/c, credit consignment a/c.

b)          For bad debts - no journal entry in the books of consignor.

 

2. If Del credere commission is not given to the consignee, any loss due to the bad debts is to be borne by the consignor. In this case, journal entry in the books of the consignor:

a)          For credit sales - debit consignee a/c, credit consignment a/c.

b)          For bad debts - debit consignment a/c, credit consignee a/c.

 

ADVANCE RECEIVED FROM CONSIGNEE

AS SECURITY DEPOSIT

JOURNAL ENTRIES

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	Cash / Bank A/c	Dr
	Bills receivable A/c	Dr
	To Adv. against consgnmnt
	(Cash / Bank Draft / Bills Receivable received from the consignee as advance)
2	Adv. against consgnmnt	Dr
	To Consignee A/c
	(Proportionate amount of advance received from the consignee as security deposit transferred to the consignee’s account in proportion of goods sold to goods sent on consignment)

 

Important notes:

1. If the advance received from the consignee is not as a security deposit, the journal entry to be made is as follows:

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	Cash/Bank A/c	Dr
	Bills receivable A/c	Dr
	To Consignee A/c
	(Advance against consignment received from the consignee)

 

2.     If the consignor discounts with bank the bill received from the consignee as advance, the discounting charge should not be transferred to the ‘Consignment to………… A/c’ because it is purely a financial expense. The bill discounting charge is actually transferred to the General Profit and Loss Account of the consignor.

 

Books of accounts of consignor

– Invoice price method

When goods are sent to consignee under invoice price method, Proforma Invoice is prepared with the invoice prices of the goods sent. Invoice price of goods sent is calculated adding certain percentage of margin/profit/load over the cost price of the goods. When goods are sent under this method, the consignee is expected to sell the goods at the invoice price or at any higher price, but not at a price less than the invoice price in any case. Therefore, it can be said that,

INVOICE PRICE =

COST PRICE + LOADING (i.e. PROFIT MARGIN)

 

JOURNAL ENTRIES

In this case, all the journal entries made under the cost price method will be made same as before. Only four journal entries will be made additionally to adjust the loading (i.e. profit margin) included in the invoice price of goods sent. The journal entries are as follows:

 

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	Goods sent on consignment	Dr
	To Consignment A/c
	(Loading on value of goods sent (net of goods returned, if any))
2	Consignment A/c	Dr
	To Stock reserve A/c
	(Loading on closing stock of consignment)
3	Stock reserve A/c	Dr
	To Consignment A/c
	(Loading on opening stock of consignment)
4	Consignment A/c	Dr
	To Profit and loss A/c
	(Loading on abnormal loss treated without opening abnormal loss account.)
5	Consignment A/c	Dr
	To Abnormal loss A/c
	(Loading on abnormal loss treated by opening abnormal loss account.)

 

RETURN OF GOODS FROM THE CONSIGNEE

JOURNAL ENTRIES

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	Goods sent on consgnmnt	Dr
	To Consignment A/c
	(Goods returned by consignee to the consignor)
2	Consignment A/c	Dr
	To Cash / Bank A/c (if  paid by consignor)
	To Consignee A/c  (if paid by consignee)
	(expenses on returning the goods by the consignee to the consignor)

 

Important notes:

1.             Same journal entries are made under both the cost price method and invoice price method.

2.             In the first journal entry goods sent on consignment account will be debited with the cost price of goods returned if cost price method is followed or with the invoice price of goods returned if invoice price method is followed.

 

Books of accounts of consignee

Following accounts are opened and maintained in the books of the consignee in regard to the consignment business:

1.             Consignor’s personal account,

2.             Commission account,

3.             Del-credere commission account (if del-credere commission is given),

4.             Consignment debtors’ account (if del-credere commission is given),

5.             Bad debts account (if del-credere commission is given).

 

JOURNAL ENTRIES

Dt.	Particulars		LF	Dr. (Rs)	Cr. (Rs)
1	NO ENTRY IS REQUIRED TO BE MADE FOR RECEIVING GOODS FROM THE CONSIGNOR.
2	Consignor A/c	Dr
	To Cash / Bank A/c
	(Expenses incurred by the consignee in connection with consignment)
3	Consignor A/c	Dr
	To Commission A/c
	To Del credere commission
	(Consignee’s commission)
4	Consignor A/c	Dr
	To Cash / Bank A/c
	To Bills payable A/c
	(Advance money paid to the consignor)
5	Cash / Bank A/c	Dr
	To Consignor A/c
	(Goods sold for cash)
6	NO ENTRY IS REQUIRED TO BE MADE FOR CREDIT SALES, IF DEL CREDERE COMMISSION IS NOT GIVEN BY THE CONSIGNOR
7	Consignment debtors A/c	Dr
	To Consignor A/c
	(For credit sales, if del credere commission is given by the consignor)
8	Cash / Bank A/c	Dr
	To Consignor A/c
	(For collections from debtors, if no del-credere commission is given)
9	Cash / Bank A/c	Dr
	To Consignment debtors
	(For collections from debtors, if del-credere commission is given)
10	NO ENTRY IS REQUIRED TO BE MADE FOR BAD DEBTS, IF DEL CREDERE COMMISSION IS NOT GIVEN
11	Bad debts A/c	Dr
	To Consignment debtors
	(For bad debts, if del-credere commission is given by the consignor)
12	Del credere commission	Dr
	To Bad debts A/c
	(For closing bad debts account)
13	Del credere commission	Dr
	To Commission A/c
	(For closing del-credere commission account, if del-credere commission is greater than amount of bad debts)
14	Commission A/c	Dr
	To Del credere commission
	(For closing del-credere commission account, if del-credere commission is less than amount of bad debts)
15	Commission A/c	Dr
	To Profit and loss A/c
	(For closing the commission account)

 

Part B

 

Financial Accounting

CONSIGNMENT ACCOUNTS

Selected Problems and Solutions

 

Illustration: 1

X Ltd. of Gujarat purchased 5,000 sarees @ Rs 100 per saree. Out of these 3,000 sarees were sent on consignment to Y Ltd. of Kolkata at the selling price of Rs 150 per saree. The consignors paid Rs 5,000 for packing and freight.

 

Y Ltd. sold 2,500 sarees @ Rs 160 per saree and incurred Rs 500 for selling expenses and remitted Rs 2,50,000 to Gujarat on account. They are entitled to a commission of 5% on total sales plus a further of 25% commission on any surplus price realized over Rs 150 per saree. 1,500 sarees were sold at Gujarat @ Rs 110 per saree.

 

Owing to fall in market price, the value of stock of saree in hand is to be reduced by 5%. You are required to prepare (i) Consignment Account, and (ii) Y Ltd. Account in the books of X Ltd.

Click here for Solution: 1 in PDF 

Illustration: 2

5,000 shirts were consigned by Raizada & Co. of Delhi to Zing of Tokyo at cost of Rs 375 each. Raizada & Co. paid freight Rs 50,000 and Insurance Rs 7,500.

 

During the transit 500 shirts were totally damaged by fire. Zing took delivery of the remaining shirts and paid Rs 72,000 on custom duty.

 

Zing had sent a bank draft to Raizada & Co. for Rs 2, 50,000 as advance payment. 4,000 shirts were sold by him at Rs 500 each. Expenses incurred by Zing on godown rent and advertisement etc. amounted to Rs 10,000. He is entitled to a commission of 5%. One of the customer to whom the goods were sold on credit could not pay the cost of 25 shirts.

 

Prepare the Consignment Account and the Account of Zing in the books of Raizada & Co. Zing settled his account immediately. Nothing was recovered from the insurer for the damaged goods.

Click here for Solution: 2 in PDF 

Illustration: 3

Lubrizols Ltd. of Mumbai consigned 1,000 barrels of lubricant oil costing Rs 800 per barrel to Central Oil Co. of Kolkata on 1.1.2013. Lubrizols Ltd. paid Rs 50,000 as freight and insurance. 25 barrels were destroyed on 7.1.2013 in transit. The insurance claim was settled at Rs 15,000 and was paid directly to the consignor.

 

Central Oil took delivery of the consignment on 19.1.2013 and accepted a bill drawn upon them by Lubrizols Ltd., for Rs 5, 00,000 for 3 months. On 31.3.2013 Central Oil reported as follows:

(i)   750 barrels were sold at Rs 1,200 per barrel.

(ii)The other expenses were:

 

Expenses	Rs
Clearing charges	11,250
Godown rent	10,000
Wages	30,000
Printing, Stationery and Advertisement	20,000

 

25 barrels of oil were lost due to leakage which is considered to be normal loss.

 

Central Oil Co. is entitled to a commission of 5% on all the sales affected by them. Central Oil Company paid the amount due in respect of the consignment on 31^st March itself.

 

Show the Consignment Account, the Account of Central Oil Co., and the Lost-in-Transit Account as they will appear in the books of Lubrizols Ltd.

 

 Click here for Solution: 3 in PDF

 

Illustration: 4

Mr. X, the consignor, consigned goods to Mr. Y 100 Radio sets valued Rs 50,000. This was made by adding 25% on cost. Mr. X paid Rs 5,000 for freight and insurance. 20 sets are lost-in-transit for which Mr. X received Rs 5,000 from the Insurance Company.

 

Mr. Y received remaining goods in good condition. He incurred Rs 4,000 for freight and miscellaneous expenses and Rs 3,000 for godown rent. He sold 60 sets for Rs 50,000. Show the necessary ledger account in the books of Mr. X assuming that Mr. Y was entitled to an ordinary Commission of 10% on sales and 5% Del Credere Commission on sales. He also reported that Rs 1,000 were proved bad.

 

Click here for Solution: 4 (With Abnormal Loss A/c)

Click here for Solution: 4 (Without Abnormal Loss A/c)

Illustration: 5

On 1.7.2012, Mantu of Chennai consigned goods of the value of Rs 50,000 to Pandey of Patna. This was made by adding 25% on cost. Mantu paid Rs 2,500 for freight and Rs 1,500 for insurance. During transit 1/10^th of the goods were totally destroyed by fire and a sum of Rs 2,400 was realised from the insurance company. On arrival of the goods, Pandey paid Rs 1,800 as carriage to godown. During the year ended 30^th June, 2013, Pandey paid Rs 3,600 for godown rent and Rs 1,900 for selling expenses.

 

1/9^th of the remaining goods were again destroyed by fire in godown and nothing was realised from the insurance company. On 1.6.2013, Pandey sold half of the original goods for Rs 30,000 and charged a commission of 5% on sales. On 30.6.2013, Pandey sent a bank draft to Mantu for the amount so far due from him.

 

You are required to prepare the following ledger accounts in the books of Mantu of Chennai for the year ended 30.6.2013:

(a)     Consignment to Patna Account;

(b)     Goods Destroyed by Fire Account; and

(c)     Personal Account of Pandey.

 

 Click here for Solution: 5 in PDF

 

Illustration: 6

Shri Babubhai oil mills of Baroda sent 10,000 kg of oil to M/s Gupta & Sons in Delhi. The cost of oil is Rs 40 per kg. Babubhai paid Rs 5,000 as freight and Rs 2,500 as insurance. In transit 250 kg of oil was accidently destroyed for which insurance company paid Rs 450 in full settlement to Babubhai.

 

M/s Gupta & Sons took delivery of the balance. Later they reported that 7,500 kg was sold @ Rs 60 per kg. Expenses incurred by them were rent Rs 2,000, advertisement Rs 5,000 and salaries Rs 5,000. M/s Gupta & Sons are entitled to commission of 3% and Del Credre commission of 1.5%. One customer who purchased 1,000 kg paid only 80% of the amount due. M/s Gupta & Sons also reported loss of 100 kg due to leakage. The final amount due was settled.

 

Prepare necessary ledger accounts in the books of Babubhai.

 

Click here for Solution: 6 in PDF

Illustration: 7

Sangita Machine Corporation sent 200 sewing machines to Rita agencies. It spent Rs 7,500 on packing. The cost of each machine was Rs 2,000, but it was invoiced at 20% above cost. 20 machines were lost in transit and the insurance company accepted claim of Rs 20,000 only.

 

Rita agencies paid freight of Rs 9,000, carriage Rs 3,600, Octroi Rs 1,800 and rent Rs 1,800. They sold 150 machines at Rs 3,500 per machine. They were entitled to commission of 5% on invoice price and additional 20% of any excess realized on invoice price and 2% Del Credre commission. They accepted a bill drawn by Sangita Machine Corporation for Rs 3, 00,000 and remitted the balance by demand draft along with account sale.

 

Draw up necessary ledger accounts in the books of Sangita Machine Corporation and Rita Agencies.

 

Click here for Solution: 7 in PDF 

Illustration: 8

Ram of Patna consigns to Shyam of Delhi for sale at invoice price or over. Shyam is entitled to a commission @ 5% on invoice price and 25% of any surplus price realized. Ram draws on Shyam at 90 days sight for 80% of the invoice price as security money. Shyam remits the balance of proceeds after sales, deducting his commission by sight draft.

 

Goods consigned by Ram to Shyam costing Rs 20,900 including freight were invoiced at Rs 28,400. Sales made by Shyam were Rs 26,760 and goods in his hand unsold at 31^st Dec, represented an invoice price of Rs 6,920. (Original cost including freight Rs 5,220). Sight draft received by Ram from Shyam up to 31^st Dec was Rs 6,280. Others were in-transit. Prepare necessary Ledger Accounts in the books of Ram.

 

Click here for Solution: 8 in PDF

Illustration: 9

R of Ranchi consigned goods costing Rs 1, 60,000 to B of Bombay. The terms of the consignment were:

(a)     Consignee to get a commission of 5 per cent on cash sales and 4 per cent on credit sales.

(b)     Any goods taken over by the consignee himself or goods lost through consignee’s negligence shall be valued at cost plus 12½ per cent and no commission will be allowed on them.

 

The expenses incurred by the consignor were: Carriage and freight Rs 6,720 and Insurance Rs 3,440. The consignor received Rs 50,000 as advance against the consignment. Account Sales together with a draft for the balance due was received by the consignor showing the following position:

Goods costing Rs 1, 28,000 were sold for cash at Rs 1, 40,000 and on credit at Rs 1, 08,000. Goods costing Rs 8,000 were taken by B and goods costing Rs 4,000 were lost through B’s negligence. The expenses incurred by B were: Advertisement Rs 1,720; other selling expenses Rs 1,080.

 

Show the ledger accounts in the books of R.

Click here for Solution: 9 in PDF