Important Note on Consignment Accounting and Summaries
MEANING OF CONSIGNMENT ACCOUNT
To consign means to send. In Accounting, the term “consignment account” relates to accounts dealing with a situation where one person (or firm) sends goods to another person (or firm) on the basis that the goods will be sold on behalf of and at the risk of the former.
The following should be noted carefully:
(i) The party which sends the goods (consignor) is called principal.
(ii) The party to whom goods are sent (consignee) is called agent.
(iii) The ownership of the goods, i.e., the property in the goods, remains with the consignor or the principal – the agent does not become their owner even though they are in his possession. On sale, of course, the buyer will become the owner.
(iv) The principal does not send an invoice to the agent. He sends only a proforma invoice, a statement that looks like an invoice but is really not one. The object of the proforma invoice is to convey information to the agent regarding particulars of the goods sent.
(v) Usually, the agent recovers from the principal all expenses incurred by him on the consignment. This however can be changed by agreement between the two parties.
(vi) It is also usual for the agent to give an advance to the principal in the form of cash or a bill of exchange. It is adjusted against the sale proceeds of the goods.
(vii) For his work the agent receives a commission, calculated on the basis of gross sale. For ordinary commission the agent is not responsible for any bad debt that may arise. If the agent is to be made responsible for bad Debts, he is to be paid a commission called del-credere commission. It is calculated on total sales, not merely on credit sales until and unless agreed.
(viii) Periodically, the agent sends to the principal a statement called Account Sales. It sets out the sales made by the agent, the expenses incurred on behalf of the principal, the commission earned by the agent and the balance due to the principal.
(ix) Firms usually like to ascertain the profit or loss on each consignment or consignments to each agent.
Consignment Account relates to accounts dealing with such business where one person sends goods to another person on the basis that such goods will be sold on behalf of and at the risk of the former
DISTINCTION BETWEEN CONSIGNMENT AND SALE
1. In Consignment Ownership of the goods rests with the consignor till the time they are sold by the consignee, no matter the goods are transferred to the consignee. But in Sales, The ownership of the
goods transfers with the transfer of goods from the seller to the buyer
2. In Consignment, The consignee can return the unsold goods to the consignor. But, Goods sold are the property of the buyer and can be returned only if the seller agrees.
3. In Consignment, Consignor bears the loss of goods held with the consignee. But, It is the buyer who will bear the loss if any, after the delivery of goods.
4. The relationship between the consignor and the consignee is that of a principal and agent. But In Sales, The relationship between the seller and the buyer is that of a creditor and a debtor.
5. Expenses done by the consignee to receive the goods and to keep it safely is borne by the consignor. Whereas, Expenses incurred by the buyer are to be borne by the buyer itself after the delivery of goods
VALUATION OF STOCK
The principle is that stock should be valued at cost or net realisable value whichever is lower, the same principle as is practised for preparing final accounts. In the case of consignment, cost means not only the cost of the goods as such to the consignor but also all expenses incurred till the goods reach the premises of the consignee. Such expenses Include packaging, freight, cartage, insurance in transit, octroi, etc. But expenses incurred after the goods have reached the consignee’s godown (such as godown rent, insurance of godown, delivery charges) are not treated as part of the cost of purchase for valuing stock on hand.
Commission is the remuneration paid by the consignor to the consignee for the services rendered to the former for selling the consigned goods. Three types of commission can be provided by the consignor to the consignee, as per the agreement, either simultaneously or in isolation. They are:
The term commission simply denotes ordinary commission. It is based on fixed percentage of the gross sales proceeds made by the consignee. It is given by the consignor regardless of whether the consignee is making credit sales or not. This type of commission does not give any protection to the consignor from bad debts and is provided on total sales.
To increase the sale and to encourage the consignee to make credit sales, the consignor provides an additional commission generally known as del-credere commission. This additional commission when provided to the consignee gives a protection to the consignor against bad debts (i.e. bad debts is no more the loss of the consignor. It is calculated on total sales unless there is any agreement between the consignor and the consignee
to provide it on credit sales only.
It is an extra commission allowed by the consignor to the consignee to promote sales at higher price then specified or to encourage the consignee to put hard work in introducing new product in the market. Depending on the agreement it is calculated on total sales or on the difference between actual sales and sales at invoice price or any specified price.
An account sale is the periodical summary statement sent by the consignee to the consignor. It contains details regarding –
(a) sales made,
(b) expenses incurred on behalf of the consignor,
(c) commission earned,
(d) unsold stock left with the consignee,
(e) advance payment or security deposited with the consignor and the extent to which it has been adjusted,
(f) balance payment due or remitted.
It is a summary statement and is different from Sales Account
ADVANCE BY CONSIGNEE vs SECURITY AGAINST CONSG.
Generally the consignor insist the consignee for some advance payment for the goods consigned at the time of delivery of goods. This advance payment is adjusted in full against the amount due by the consignee on account of the goods sold. But if the advance money deposited by the consignee is in the form of security against the goods consigned then the full amount is not adjusted against the amount due by the consignee to the consignor on account of goods sold in case, there is any unsold stock left with the consignee. In that case proportionate security in respect of unsold goods is carried forward till the time the respective goods held with the consignee are sold.
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