Chapter 11 – RR: Consignment

RR - Consignment
Accounting for Consignment Sale Transactions
A consignment constitutes the transfer of possession of merchandise without the transfer of title from the
owner, called the consignor, to another person, called the consignee. The consignee acts as an agent
in behalf of the consignor for the purpose of selling the goods for a commission.

The shipment of goods to the consignee is not treated as a sale. Although a transfer of goods has taken
place, it is not the intent of either the consignor or the consignee that sale and purchase transactions
take place. Title of the goods remains with the consignor, and recognition of the sale is deferred until
goods are transferred to a third party by the consignee. In other words, the intent of the parties is to
transfer title directly from the consignor to the third party.

A modified version of the sales basis (regular sales) of revenue recognition is used by the consignor.
Revenue is recognized only after the consignor receives notification of sale and the cash remittance
from the consignee.

The merchandise is carried throughout the consignment as the inventory of the consignor, separately
classified as Merchandise Inventory on Consignment. It is not recorded as an asset on the consignee’s
books. Upon sale of the merchandise, the consignee has liability for the net amount due the consignor.
The consignor periodically receives from the consignee account sales that show the merchandise
received, merchandise sold, expenses chargeable to the consignment, and the cash remitted.
Revenue then is recognized by the consignor. At that time, the transaction is recorded as a sale on the
books of the consignor.
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When an entity delivers its product to a dealer for distributor for sale to end
customers, the entity needs to determine whether the contract is a sale or a
consignment arrangement.

The dealer or distributor has Recognize revenue when the product is shipped
or delivered to the dealer or distributor
Sales obtained control of the product
(depending on the terms of the contract.)

The dealer or distributor has not Recognize revenue when the dealer or distributor
sells the product to a customer, or when the
Consignment obtained control of the product
dealer or distributor obtains control of the product
(i.e. after a specified period of time expires).
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The following are indicators of a consignment arrangement:
• The entity controls the product until a specified event occurs, such as the
sale of the product to a customer or until a specified period expires
• The entity can require the return of the product or transfer the product to
another party
• The dealer does not have an unconditional obligation to pay the entity for
the product (although it might be required to pay a deposit).

A common principal-agent relationship involves consignments. In these cases,

manufacturers (or wholesalers) deliver goods but retain title to the goods until
they are sold. This specialized method of marketing certain types of products
makes use of an agreement known as a consignment.
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 Under this arrangement, the consignor (manufacturer or wholesaler) ships merchandise to the consignee
(dealer), who is to act as an agent for the consignor in selling the merchandise. Both consignor and
consignee are interested in selling – the former to make a profit or develop a market, the latter to make
a commission on the sale.
 The consignee (dealer), who is to act as an agent for the consignor in selling the merchandise, accepts
the merchandise and agrees to exercise due diligence in caring for and selling it. The consignee remits to
the consignor cash received from customers, after deducting a sales commission and any chargeable
expenses. Agent’s performance obligation is to arrange for principal to provide goods or services to a
customer.
 In consignment sales, the consignor uses a modified version of the point-of-sale basis of revenue
recognition. That is, the consignor recognizes revenue only after receiving notification of the sale and
cash remittance from the consignee.
 The consignor carries the merchandise as inventory throughout the consignment, separately classified as
inventory (consignment). The consignee does not record the merchandise as an asset on its books. Upon
sale of the merchandise, the consignee has a liability for the net amount due to the consignor.
 The consignor periodically receives from the consignee a report called account sales that shows the
merchandise received, merchandise sold, expenses chargeable to the consignment, and the cash
remitted. Revenue is then recognized by the consignor.
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Advantages of a Consignment Arrangement
 A consignment arrangement offers certain advantages to both the consignor and the consignee. A consignee
may prefer shipping goods on consignment for the following reasons:
1. Wider Markets for a Product. Dealer may not be willing to assume the risk of purchasing certain goods, such as a
new product or an item that may become obsolete, but may be willing to carry them on consignment.
2. Control over Selling Price. If goods are sold directly to the consignee, the consignor may find it difficult to establish
and control the selling price of goods.
3. Recovery of an Asset. In as much as the legal title does not transfer to the consignee, the consignor has the right
to possession of all unsold goods or the right to payment for goods sold if the consignee declares bankruptcy.
Creditors of the consignee do not have the claim against the consigned assets that they would have if the goods
had been sold to the consignee.

 The consignee may find a consignment arrangement attractive primarily for the following reasons:
1. Avoid Risk of Ownership. Goods that do not sell or that become obsolete deteriorate, or decline in market value
may be returned to the consignor.
2. Requires less Capital. The consignee does not incur liability and does not make cash payment on the goods until
they are sold. Thus, the consignee’s capital investment will be lower if the goods are held on consignment

 Even with these advantages, consignment arrangements have been declining in use as a result of
changing business practices, such as the tendency toward more liberal return policies on non-consignment
sales.
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Rights and Responsibilities of the Consignee
 Before goods are transferred on consignment, a written agreement should specify clearly the intent of the parties. The
agreement should address such issues as the amount and type of the consignee’s expenses to be reimbursed by the
consignor, how the consignee’s commissions are to be computed, when commissions are to be paid, the credit terms and
conditions, if any, to be considered by the consignee in granting credit, and the responsibility for collection of receivables.
 The agreement should be complete and attempts to avoid potential points of conflict. For items not provided for in the
agreement that result in litigation, the laws of bailment and agency apply.

Rights of the Consignee

Some of the more important rights and responsibilities of the consignee are:
1. Compensation.
2. Reimbursement for Advances and Necessary Expenses.
3. Granting of Credit.
4. Warrant of Consigned Goods.

Responsibilities of the Consignee

1. Care and Protection for Consigned Goods.
2. Identification of Consigned Goods and Receivables
3. Due Care in Granting and Collecting Receivables
4. Timely Periodic Reporting of Sales and Collections
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Accounting by the Consignor
 The journal entries to be made on the books of the consignor vary, depending on:
• Whether consignment transactions are recorded in separate ledger accounts for the purpose of determining
profits on consignment sales, or are simply combined with the regular account balances, and
• Whether a perpetual or periodic inventory system is used

 Because title to the merchandise is held by .the consignor but physical possession is held by the
consignee, special accounting records must be maintained by the consignor for control purposes.

 No revenue is recognized until a sale is made by the consignee. Upon shipment of the merchandise by the
consignor, an inventory account is established on the consignor's books to identify the consigned
merchandise.

 Any consignment expenses paid by the consignor are added to the inventory balance as added costs. The
consignee does not make an entry for receipt of the Inventory in the general ledger; however,
memorandum control records usually are kept.

 Any reimbursable expense paid by the consignee is charged to a receivable account by consignee and
added to the inventory balance by the consignor.

 When a sale is made, consignor recognizes the sale as revenue according to one of the revenue
recognition methods, and the consignee recognizes the commission as revenue on the transaction.
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Consignor’s: Methods of Recording Consignment
1. Consignment transactions recorded separately – this method determines consignment profit
separate from regular sales. An inventory account called as Inventory on Consignment* is used to
record transactions in relation to consignment.
 Inventory on Consignment* account is debited for:
• Cost of goods shipped on consignment
• Expenses related to consignment incurred by the consignor
• Reimbursable expenses related to consignment paid by the consignee.

 Inventory on Consignment* account is credited for:

• Cost of goods returned by the consignee
• Cost of consignment sales and expenses relating to consignment
 *account term “consignment-out” maybe alternatively used when consignment profit can be
calculated separately

2. Consignment transactions not recorded separately – consignment transactions are treated like a
regular type of sales. Determination of consignment profit is not required because it is already part
of the profit of the entire entity
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Accounting by the Consignee
Accounting procedures established by the consignee must recognize that goods received on consignment are not owned.
However, as noted earlier, the consignee must:
• Maintain records and controls that permit the identification of:
a. Goods held on consignment and
b. Related receivables and reimbursable expenses, and
• Prepare periodic reports. The consignee normally creates a special account: Consignor Receivable or Consignor Payable* ,

Consignee’s
1. Consignment transactions recorded separately – under this method, two accounts are needed to be maintained in relation
to consignment transactions:
 Consignor receivable* account is:
• debited for expenses paid by the consignee but chargeable to the consignor
• credited when remittance is made to the consignor
 Consignor payable* account is:
• credited for the sales by the consignee
• debited when remittance is made by the consignor
*** account term “consignment-in” maybe alternatively used when consignment profit can be calculated separately

2. Consignment transactions not recorded separately – consignment transactions are treated like a regular type of sales.
Determination of consignment profit is not required because it is already part of the profit of the entire entity.
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The following costs and expenses for the consignment transactions should carefully be noted:
• Items to be allocated between sold and unsold items:
a. Freight cost paid by the consignor upon shipment
b. Freight and cartages paid by the consignee upon receipt of the shipment
c. Insurance freight of consigned goods
d. Packaging costs of consigned goods
e. Costs and fees such as repairs, installation of devices paid by the consignor and/or consignee
related to the consigned goods.

• Items chargeable to the sold units:

a. Commissions
b. Delivery and installation
c. Advertising
d. Reconditioning on delivered units to customers
e. Insurance in transit to customers
f. Expenses related to returned units delivered
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Consignment Sales

 The accounting procedures regarding consignment sales under PFRS 15 still

remains and for purposes of overview regarding the application of PFRS 15 on
consignment:
• Manufacturers (or wholesalers) deliver goods but retain title to the goods until they
are sold.
• Consignor (manufacturer or wholesaler) ships merchandise to the consignee
(dealer), who is to act as an agent for the consignor in selling the merchandise.
Consignee makes a commission on the sale.
• Consignor makes a profit on the sale and carries merchandise as inventory.
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Determination of Net Income, Deferred Consignment Costs and Goods Returned

 In order to determine the net income profit from sales in this period and the cost to be
deferred, it is necessary to allocate the total cost identified with the goods on consignment
between the units sold in this period (to be matched against consignment sales in this period)
and the units still on hand at the end of the period (to be reported as inventory on the
consignor's balance sheet).

 When allocation is made, costs are classified as either inventoriable or non-inventoriable.

 inventoriable costs (product costs) are those considered necessary to acquire the product, and
get it to the location of sale, and prepare it for sale. Inventoriable costs are said to attach to the
inventory and become a part of the total cost, or total valuation of the inventory. In Illustration 9-
10, the cost of the goods, the freight-out (shipment to consignee) or freight expenditures were
considered costs necessary to get the goods to a location for sale and in a salable condition.
Such costs are deducted from (matched against) consignment revenues in the accounting
period in which the individual units are sold.
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Determination of Net Income, Deferred Consignment Costs and Goods Returned – Cont:
 Other costs incurred by the consignee and consignor do not add to the utility of
the goods and are considered non-inventoriable or period costs. Period costs are
expensed in the accounting period in which the expense is incurred.

 Costs such as commissions earned by the consignee and the cost of repairing two
of the units sold did not add to the value of the unsold units .and were expensed
currently. Advertising is considered a period expense, even though there may be
some future benefits.

 Freight on shipments to the consignee is considered an inventoriable cost to the extent

that it does not exceed the normal costs of direct shipment from the consignor.
Excessive freight on consignments should not be included in the value of the unsold
units, but should be expensed currently as a period charge.

 Other inventoriable costs may be incurred by the consignor when unsold units are
returned by the consignee. Freight on sets returned is charged against sales of the
period.
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Reporting Consignment Transactions in the Financial Statements of the Consignor

 A consignee may advance a portion of the anticipated sales price to the

consignor or may remit more than the amount due based on the consignment
transactions up to the end of the period. The amount of these advances or excess
remittances should be credited to a current liability account, Advances from
Consignee.

 Conversely, a receivable from the consignee should be established if the

consignee remits less than the amount disclosed by the account sales report.

 The income statement may take various forms, depending on the degree of
detail desired in the disclosure of consignment sales. This, of course, should be
influenced by the significance of consignment sales to the consignor.
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