Consignment

Consignment Goods Consignee Consignor (Agent) (Owner of the goods) Consignment account Goods sent on Consignee account Goods Net proceeds + Account sales Consignee (Agent) Consignor account

Nature of a consignment If the owner of the goods does not have retail outlets, he can consign the goods to an agent. The agent will sell the goods for him and receive a commission in return.

Consignor The owner of the goods who sends the goods to an agent for sale. Consignee Who sells the goods for the consignor. Sells the goods and collects the money from the customers. Will pay the consignor the net proceeds (Proceeds – Expenses – Commission) and provide the consignor an account sales showing all the proceeds and expenses.

Goods sent on consignment Goods sent on consignment are the property of the consignor until the goods are sold. The consignor should include all the unsold goods on consignment in his closing stock.

Consignor’s Books Consignment account It is a profit and loss account for the consignment. Consignment Account Expenses Income

2. Consignee account Consignee Account Amount owing form consignee e.g. Sales Amount owing to consignee e.g. Expenses, commission

3. Goods sent on consignment account Transferring to trading account Cost of goods sent

4. Summary of procedures Transactions Double entries 1. Goods sent on consignment Dr Consignment Cr Goods sent on consignment 2. Expenses incurred by the consignor. Cr Bank 3. Expenses incurred by the consignee and the commission payable to the consignee. Cr Consignee 4. Sales recorded on the account sales Dr Consignee Cr Consignment

6. Insurance claim received for normal stock loss Dr Bank 5. Normal loss Normal loss of stock of the consignment which was not insured. (Normal loss: damaged stock, obsolete stock) No entry 6. Insurance claim received for normal stock loss Dr Bank Cr Consignment Abnormal loss Abnormal stock loss credited to consignment account. (Abnormal loss: fire loss, burglary loss, stolen in transit) Dr Bank/Insurance company Dr Profit and Loss Cr Consignment(Total loss) 8. Payment from the consignee by cheque or bill Dr Bank/Bills receivable Cr Consignee 9. Cost of goods sent on consignment credited to trading account. Dr Goods sent on consignment Cr Trading account 10. Profit on the consignment is transferred to the profit and loss account. (Reverse the entries if it is a loss.) Dr Consignment Cr Profit and loss

Goods sent on consignment account $ Trading x $ Consignment x

Consignment $ Goods sent on consignment x Banks-consignor’s expenses x Consignee- consignee’s expenses x consignee’s commission x P & L-profit on consignment x x $ 4. Consignee-sales x 6. Bank/Insurance Co.-claim x 7. Profit and Loss-net stock loss x _ x

Consignee $ Consignment-sales x _ x $ 3. Consignment-consignee’s expenses x consignee’s commission x 8. Bank-settlement from consignee x x

Consignee $ Consignment-sales 18,000 ______ 18,000 $ Consignment-expenses 2,400 -commission 1,800 8. Bank 13,800 18,000

E. Bad debts of Consignments A consignee(agent) sells goods and collects money on behalf of the consignor. If he can’t collect the debts, these debts should be treated as the bad debts of the consignor. Accounting entries in the books of the consignor: Dr Consignment Cr Consignee

Consignment Consignee $ Consignee-bad debts x $ Consignment-bad debts x

If a consignee receives an additional commission (del credere commission), he must bear all the losses from the bad debts. In case of a bad debts arising from sales of goods on consignment, no entry is required in the books of the consignor.

Accounting entries in the books of the consignee Dr Bad debts Cr Debtors (with the bad debts borne by the consignee personally)

Valuation of stock If there are unsold goods on consignment at the end of the accounting period, the value of the unsold stock will be carried down to the following period.

Consignment $ Year 1 x Year 2 Balance b/d x $ Year 1 Balance c/d – value of unsold stock x x

Valuation of stock = Consignor’s Cost +Consignee’s Expenses

Consignor’s cost = Total consignor’s cost * Units of closing stock / Total units of goods SENT on consignment = [Cost of goods on consignment + Consignor’s expenses] * Units of closing stock / Total units of goods SENT on consignment

Consignee’s expense = Total consignees expenses (excluding marketing expenses) * Units of closing stock / Total units of goods RECEIVED by consignee (after normal loss) Marketing expenses e.g. advertising expenses,ordinary commission,del credere commission, salesmen’s salaries, bad debts, discounts allowed, delivery charges(to customers), selling expenses, distribution expenses.

Example

Consignment $ Goods on Consignment 60,000 Chan – sales 94,000 (500+440)*$100 Bank - freight 500 - insurance 200 Chan – port charges 700 - delivery charges to warehouse 1,280 - advertising 1,000 - delivery charges to customer 900 - dis. allowed 320 - ordinary com. 4,700 ($94000*5%) - del credere com. 500 (50000*1%)

Workings Value of the stock loss (10 boxes) = $607

Consignment $ Goods on Consignment 60,000 Chan – sales 94,000 (500+440)*$100 Bank - freight 500 - insurance 200 Bank – claim 300 Profit and Loss – stock loss 307 (607-300) Chan – port charges 700 - delivery charges to warehouse 1,280 - advertising 1,000 - delivery charges to customer 900 - dis. allowed 320 - ordinary com. 4,700 ($94000*5%) - del credere com. 500 (50000*1%)

Workings Value of the Closing Stock Consignor’s Cost: ($1,000 * $60 + $500 + $200) * 50/1,000 3,035 Consignee’s Expenses: ($700 + $1,280) * 50/990 100 3,135

Consignment $ $ Goods on Consignment 60,000 Chan – sales 94,000 (500+440)*$100 Bank - freight 500 - insurance 200 Bank – claim 300 Profit and Loss – stock loss 307 (607-300) Chan – port charges 700 - delivery charges to warehouse 1,280 - advertising 1,000 - delivery charges to customer 900 - dis. allowed 320 - ordinary com. 4,700 ($94000*5%) - del credere com. 500 (50000*1%) Balance c/d 3,135 Profit and Loss – Profit on consignment 27,642 97,742 97,742

Chan $ $ Consignment port charges 700 Consignment - sales 94,000 delivery changes to warehouse 1,280 advertising 1,000 delivery charges to customers 900 dis. allowed 320 ordinary com. 4,700 del credere com. 500 Consignment - sales 94,000 Bank 84,600 94,000 94,000

Consignee’s books A consignee collects sales proceeds and pays expenses on behalf of the consignor. A consignor account should be maintained to record the money due to or due from the consignor.

Summary of procedures Transactions Double entries 1. Goods received form consignor. No entry 2. Expenses paid by the consignor. 3. Commission received (ordinary and del credere commission). Dr Consignor Cr Commission Received 4. Expenses paid on behalf of the consignor. Cr Bank 5. Discounts allowed to customers/ Cr Debtors

6. Bad debts borne by the consignor. Dr Consignor Cr Debtors Bad debts borne by the consignee personally. (When the consignee receives a del credere commission, he should bear all losses from bad debts) Dr Profit and Loss/Bad Debt 8. Cash sales Dr Bank/Cash Cr Consignor 9. Credit sales Dr Debtors 10. Payment to the consignor by cheque or bill Cr Bank/Bill payable

Consignor Account $ Bank – consignee’s expenses x Commission Received x - ordinary x - del credere x Debtors – dis. allowed x Debtors – bad debts x Bank / Bill payable – to consignor x x $ Bank – sales x Debtors – sales x _ x

Tang – Consignor Account Example The facts are the same as in the pervious example, but the transaction would be shown in the books of consignee. In Chan’s Books Tang – Consignor Account $ $ Bank -port charges 700 -delivery changes to warehouse 1,280 -advertising 1,000 -delivery charges to customers 900 Debtor – sales (500 x $100) 50,000 Bank – sales (440 x $100) 44,000 Commission Received ordinary 4,700 Del credere 500 Bank – to consignor 84,600 94,000 94,000

Further Considerations

Consignments and the Final Accounts The accounts related to a consignment would be disclosed in the final accounts as follows:

Trading and Profit and Loss Account In Consignor’s Book Trading and Profit and Loss Account $ $ $ Opening Stock N Add Purchases T Less Goods on Consignment C N N Less Closing Stock N Cost of Goods Sold N Gross Profit N Expenses N Stock Loss of Consignment C Net Profit T Sales N N Gross Profit N Consignment Profit C T T N=figure from normal trading; C=figure from Consignment T= Total figures

Balance Sheet (Extract) $ $ Current Assets Stock (N+C) T Consignee Account (if it is a debit balance) C Current Liabilities Consignee Account (if it is a credit balance) C OR

Trading and Profit and Loss Account In Consignee’s Book The only entries needed is for the commission received. Trading and Profit and Loss Account $ $ $ Opening Stock N Purchases N N Less Closing Stock N Cost of Goods Sold N Gross Profit N Expenses N Bad Debts N Bad Debts (If he has received a del credere commission, he will bear the Consignment’s bad debts) C Net Profit T Sales N N Gross Profit N Commission Received (from consignor) C T T

Balance Sheet (Extract) $ $ Current Assets Stock N Consignor Account (if it is a debit balance) C Current Liabilities Consignor Account (if it is a credit balance) C OR

Consignments and Joint Ventures: If the party to a joint venture sends some goods to an agent for sale, the transactions will be entered as follows: No consignment account is opened If no consignment account is kept, all the transactions of the consignements should be recorded in the foint venture account. A consignemnt account is opened

(i) No consignment account is opened Joint Venture Account $ $ Bank – joint venture expenses X Bank – consignment expenses incurred by the consignor X Consignee – consignment expenses incurred by the consignee X Profit and Loss – share of profit X Bank – settlement X Bank – joint venture sales X Consignee – consignment sales X Stock c/d – unsold stock of joint venture and consignment X X X

Memorandum Joint Venture Account $ $ Expenses – joint venture and consignment X Share of Profit: A X B X X Sales – joint venture and consignment X Stock c/d – joint venture and consignment X X X

(ii) A consignment account is opened Joint Venture Account $ $ Bank – joint venture expenses X Profit and Loss – share of profit X Bank – settlement X Bank – joint venture sales X Goods Sent on Consignment X Consignment – profit X Stock c/d – unsold stock of joint venture only X X X

Consignment Account Sales – joint venture only X $ $ Goods Sent on Consignment X Bank – expenses X Consignee – expenses X Joint Venture – consignment profit X Sales – joint venture only X Goods Sent on Consignment X Consignment – profit X Stock c/d – joint venture only X X X

Memorandum Joint Venture Account $ $ Expenses – joint venture only X Share of Profit: A X B X X Sales – joint venture only X Goods Sent on Consignment X Consignment – profit X Stock c/d – joint venture only X X X