SEMESTER - 1

FINANCIAL ACCOUNTING
CHAPTER 2 - CONSIGNMENT
Introduction-Meaning of Consignment - Consignment Vs Sales -Proforma Invoice -
Accounts Sales -Types Commission - Accounting for Consignment Transactions &
Events in the books of Consignor only - Treatment of Normal & Abnormal Loss. -
Valuation of Closing Stock-Goods sent at Cost Price and Invoice Price.

MEANING

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 or the consignee does not become their owner even though goods are
in his possession. On sale, of course, the buyer will become the owner.
(iv) The consignor does not send an invoice to the consignee. 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 only to convey information to the consignee
regarding particulars of the goods sent.
(v) Usually, the consignee recovers from the consignor 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 consignee to give an advance to the consignor 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 consignee receives a commission calculated on the basis of
gross sale. For ordinary commission the consignee 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 consignees ends to the consignor a statement called Account
Sales. It sets out the sales made by the consignee, the expenses incurred on behalf
of the consignor, the commission earned by the consignee and the balance due to
the consignor.
(ix) Firms usually like to ascertain the profit or loss on each consignment or
consignments to each consignee.
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.

S.No. Consignment Sale

1. Ownership of the goods rests with the The ownership of the goods transfers with
consignor till the time they are sold by the the transfer of goods from the seller to the
consignee, no matter the goods are buyer.
transferred to the consignee.
2. The consignee can return the unsold Goods sold are the property of the
goods to the consignor. buyer and can be returned only if the
seller agrees.
3. Consignor bears the loss of goods held It is the buyer who will bear the loss if
with the consignee. any, after the transfer of goods.
4. The relationship between the consignor The relationship between the seller and
and the consignee is that of a principal the buyer is that of a creditor and a
and agent. debtor.
5. Expenses done by the consignee to Expenses incurred by the buyer are to
receive the goods and to keep it safely be borne by the buyer itself after the
are borne by the consignor unless there is transfer of goods.
any other agreement.

Commission Discount
Commission may be defined as The term discount refers to any reduction
remuneration of an employee or agent or rebate allowed and is used to express
relating to services performed in one of the following situations:
connection with sales, purchases, An allowance given for the settlement of
collections or other types of business a debt before it is due i.e. cash discount.
transactions and is usually based on a An allowance given to the whole sellers
percentage of the amounts involved. or bulk buyers on the list price or retail
Commission earned is accounted for as an price, known as trade discount. A trade
income in the books of accounts, and discount is not shown in the books of
commission allowed or paid is accounted account separately and it is shown by way
for as an expense in the books of the party of deduction from cost of purchases.
availing such facility or service.
ACCOUNTING FOR CONSIGNMENT TRANSACTIONS AND EVENTS IN THE
BOOKS OF THE CONSIGNOR

For ascertaining profit or loss on any transaction (or series of transactions) there is one
golden rule; open an account for the transaction (or series of transactions) and (i) put down
the cost of goods and other expenses incurred or to be incurred on the debit side; and (ii)
enter the sale proceeds as also the cost of goods remaining unsold on the right hand side
or the credit side. The difference between the total of the two sides will reveal profit or
loss. There is profit if the credit side is more.
The consignor often dispatches goods to various consignees and he would be interested to
ascertain the profit or loss from each consignment separately. Therefore, a separate
consignment account has to be prepared for each consignment. Each consignment account
is a nominal-cum-personal account and constitutes a profit and loss account in respect of
the transactions to which it relates.
The consignor records the following transactions in his book of accounts:
1. When goods are consigned or dispatched: it is to be reiterated that when goods
are sent to the consignee, the transaction does not result in a sale and only the
possession of the goods changes. Therefore, the personal account of consignee is
not debited and also sales account is not credited. The following entry is recorded
by the consignor:
Consignment Account Dr.
To Goods Sent on Consignment Account
2. Expenses incurred by consignor: when consignor incurs some expenses relating
to the consignment following entry is recorded:
Consignment (say to Star trading) Account Dr.
To Supplier Account/Bank/Cash
Unlike normal practice to debiting expense accounts first and then transferring to
profit and loss account, expenses are directly debited to consignment account.
3. When advance is received from the consignee: The consignee may remit some
advance to consignor. The following entry is recorded:
Bank/Cash Account Dr.
To Consignee’s Personal Account
4. On receipt of account sales from the consignee: Account sales contains details
of sales made by consignee, expenses incurred by consignee. Following entries
are recorded
For sales proceeds
Consignee’s Personal Account Dr.
To Consignment Account
For expenses incurred by consignee
Consignment Account Dr.
To Consignee’s Personal Account
5. Cash or cheque or bank draft or bill of exchange/promissory note received from
the consignee as settlement:
Cash/Bank/Bills Receivable Account Dr.
To Consignee’s Personal Account
6. For bad debts: The accounting entry for bad debts will depend on whether del-
credere commission is paid to the consignee
i. When del-credere commission is not paid
to the consignee Consignment Account Dr.
To Consignee’s Personal Account
ii. When del-credere commission is paid
No entry is recorded
7. For the goods taken over by the consignee
Consignee’s Personal Account Dr.
To Consignment Account
8. For unsold consignment stock: In case some of the goods sent on consignment
are still unsold at the time of preparing final accounts, the unsold inventory is
recorded as consignment stock with following entry:
Consignment Stock Account Dr.
To Consignment Account
9. For commission payable to consignee
Consignment Account Dr.
To Consignee’s Personal Account
Note:
The principle is that inventories should be valued at cost or net realizable 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, import duty etc. But expenses incurred after the goods have reached the
consignee’s godown (such as godown rent, insurance of godown, delivery charges,
salesman salaries) are not treated as part of the cost of purchase for valuing
inventories on hand.
If the expected selling price of inventories on hand is lower than the cost, the inventories
should be valued at expected net selling price only, i.e. expected selling price less delivery
 expenses, etc.
Sometimes the proforma invoice is made out at a value higher than the cost and entries
in the books of the consignor are made out on that basis – even the inventories remaining
unsold will initially be valued on the basis of the invoice price. It must be remembered,
however, that the profit or loss can be ascertained only if sale proceeds (plus) inventories
on hand, valued on cost basis, is compared with the cost of the goods concerned together
with expenses. Hence, if entries are first made on invoice basis, the effect of the loading
(i.e., amount added to arrive at the invoice price) must be removed by additional entries.
Additional entries (before ascertaining profit) to remove the effect of loading:
(a) Goods sent on Consignment A/c Dr.
To Consignment to Wye A/c
[Entry (i) reversed to the extent of loading in order to debit the Consignment A/c on cost
basis].
(b) Consignment to Wye A/c Dr. 2,000
To Inventory Reserve Account 2,000
What would be the situation if the commission includes del-credere commission also?
In this regard it is to be noted that when del – credere commission is paid to the
consignee, the consignee account is debited in the books of consignor for both cash and
credit sales. But if no such del – credere commission is paid then consignee account
cannot be debited for credit sales and in that case the following entry is passed in the
books of consignor for credit sales.
Consignment Trade receivables A/c Dr.
To Consignment A/c
The difference is because in case del-credere commission is paid to consignee then
consignee is responsible to bear any loss of bad debts and he will have to pay full amount
of sales to consigner. Accordingly, in the books of consignor, whole amount (cash sales
plus credit sales) is shown as receivable from consignee. On the other hand if del-
credere commission is not paid than consignor is responsible to bear loss of bad debts,
therefore, till the time consignee has not received money from customers, it is not shown
as receivable from consignee.
Question 1
Exe sent on 1st July, 2019 to Wye goods costing ` 50,000 and spent ` 1,000 on packing etc. On
3rd July, 2019, Wye received the goods and sent his acceptance to Exe for ` 30,000 payable at
3 months. Wye spent ` 2,000 on freight and cartage, ` 500 on godown rent and ` 300 on
insurance. On 31st December, 2019 he sent his Account Sales (along with the amount due to
Exe) showing that 4/5 of the goods had been sold for ` 55,000. Wye is entitled to a commission
of 10%. One of the customers turned insolvent and could not pay ` 600 due from him. Show
the necessary journal entries in the books of consignor. Also prepare ledger accounts.
NORMAL LOSS
If some loss is unavoidable, it would be spread over the entire consignment while valuing
inventories. The total cost plus expenses incurred should be divided by the quantity available
after the normal loss to ascertain the cost per unit.
ABNORMAL LOSS
If any accidental or unnecessary loss occurs, the proper thing to do is to find out the cost
of the goods thus lost and then to credit the Consignment Account and debit the Profit
and Loss Account – this will enable the consignor to know what profit would have been
earned had the loss not taken place
Normal loss Abnormal loss
Normal loss occurs due to inherent nature of Abnormal loss occurs mainly because of
the unforeseen events e.g. accident or natural
goods being shipped e.g. leakage, calamity etc.
evaporation, loss of perishable goods etc.
Normal loss is not accounted for Abnormal loss is accounted for immediately
immediately and is in profit and loss account.
loaded on the remaining goods. It gets
accounted for as cost of remaining goods as
and when they are sold.
As normal loss is added to cost of remaining Abnormal loss does not impact gross profit.
goods, it impact gross profit.
Insurance companies generally do not cover Insurance is generally available for abnormal
normal losses.
loss as it is expected to be incurred on each
consignment or storage of goods.
Normal loss is almost certain however it Abnormal loss is because of unforeseen
may vary from time to time. events and is not certain.

Following entry is recorded for abnormal loss:

Abnormal Loss Account Dr.
To Consignment Account
If abnormal loss is recoverable from insurance

Insurance Company’s Account DR .

To Abnormal Loss Account
If abnormal loss is recoverable from the consignee
Consignee’s Personal Account Dr.
To Abnormal Loss Account
If abnormal loss is not recoverable, Abnormal Loss Account is transferred to Profit & Loss
Account.

Commission is the remuneration paid by the consignor to the consignee for the services
rendered to the former for selling the consigned goods
Ordinary Commission
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.
Del-credere Commission
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. In other words, after providing the del-
credere commission, 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.
Over-riding Commission
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.
In order to encourage the consignee to earn higher margins, it can also be in the form of
share of additional profits made by consignee on sale of goods.
RETURN OF GOODS FROM THE CONSIGNEE
Consigned goods can be returned by the consignee because of many reasons like poor quality
or not upto the specimen or destroyed in transit etc. In such a situation, the question arises
what is the valuation of returned goods. Consigned goods returned by the consignee to the
consignor are valued at the price at which it was consigned to the consignee. Expenses
incurred by the consignee to send those goods back to the consignor are not taken into
consideration while valuing it because the goods were already in a salable conditions and
location and changing the location back from consignee to consignor is not a cost which must
have to be incurred to sell the goods. This is generally called secondary freight in accounting
terms.

ACCOUNT SALES

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 inventories 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.

ACCOUNTING IN THE BOOKS OF THE CONSIGNEE

The consignee is not concerned when goods are consigned to him or when the
consignor incurs expenses. He is concerned only when he sends an advance to the
consignor, makes a sale, incurs expenses on the consignment and earns his commission.
He debits or credits the consignor for all these as the case may be. Following entries are
recorded in the books of consignee:

1. On making sales
Cash/Bank Account/Debtors Dr.
To Consignor’s Personal Account
2. For expenses incurred and his commission
Consignor’s Personal Account Dr.
To Bank Account
3. For advance paid to consignor
Consignor’s Personal Account Dr.
To Bank Account

4. For recording bad debts

Bad Debts Account Dr.
To Customer’s Account
5. For writing off bad debts
(a) When del-credere commission is not allowed
Consignor’s Personal Account Dr.
To Bad Debts Account
(b) When del-credere commission is allowed
Commission Account Dr.
To Bad Debts Account
 Question 2

1,000 toys consigned by Rosie & Co. of Calcutta to Sahoo of Srinagar at a cost of `150
each. Rosie & Co. paid freight ` 10,000 and insurance ` 1,500. During the voyage 100 toys
were totally damaged by fire and had to be thrown overboard. Sahoo took delivery of the
remaining toys and paid `14,400 as customs duty. Sahoo sent a bank draft to Roy & Co.
for `50,000 as advance payment and later sent an account sales showing that 800 toys had
been sold at `220 each. Expenses incurred by Sahoo on godown rent and advertisement,
etc., amounted to
`2,000. Sahoo was entitled to commission of 5 per cent. One of the credit customers could
not pay for 5 toys.
You are required to prepare the Consignment Account, Goods sent on consignment,
Inventories on consignment account and Sahoo’s a/c in the books of Rosie & Co.,
assuming that nothing has been recovered from the insurers due to a defect in the policy.
Sahoo settled his account immediately.

Question 3
Nike sports Co. of New Delhi consigned 100 shoes to Adidas Co. of Ahmedabad costing
` 1,500 each, invoiced at ` 2,000 each. The consignor paid freight ` 10,000 and insurance
in transit ` 1,500. During transit, 10 shoes were totally damaged. Adidas Co took delivery
of remaining shoes and paid ` 1,530 for octroi duty. Adidas co. sent a bank draft to Nike
sports Co. for ` 50,000 as advance and later on sent an account sales showing that 80 shoes
had been sold @` 2,200 each. Expenses incurred by Adidas Co. on godown rent were `
2,000. Adidas Co. is entitled to a commission of 5% on invoice price and 25% on any
surplus of sale price over invoice price. Insurance claim was settled at ` 14,000.
Prepare consignment account, consignee’s account and the related working notes
account in the books of the Nike sports Co.

ADVANCE BY THE CONSIGNEE VS SECURITY AGAINST THE

CONSIGNMENT
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 if, there is any unsold inventory 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.
 Question 4

Miss Rakhi consigned 1,000 radio sets costing `900 each to Miss Geeta, her agent on 1st
July, 2020. Miss Rakhi incurred the following expenditure on sending the consignment.
Freight ` 7,650
Insurance ` 3,250
Miss Geeta received the delivery of 950 radio sets. An account sale dated 30th
November, 2020 showed that 750 sets were sold for `9,00,000 and Miss Geeta
incurred `10,500 for carriage.
Miss Geeta was entitled to commission 6% on the sales effected by her. She incurred
expenses amounting to
`2,500 for repairing the damaged radio sets remaining in the inventories.
Miss Rakhi lodged a claim with the insurance company which was admitted at `35,000.
Show the Consignment Account and Miss Geeta’s Account in the books of Miss
Rakhi.

Question 5
Vikram Milk Foods Co. Ltd. of Vikrampur sent to Sunder Stores, Sonepuri 5,000 kgs of
baby food packed in 2,000 tins of net weight 1 kg and 6,000 packets of net weight 1/2 kg
for sale on consignment basis. The consignee’s commission was fixed at 5% of sale
proceeds. The cost price and selling price of the product were as under:

1 kg. tin 1/2 kg. packet

` `
Cost Price 10 6
Selling Price 15 7
The consignment was booked on freight “To Pay” basis, and freight charges came to 2%
of selling value. One case containing 50 (1kg. tins) was lost in transit and the transport
carrier admitted a claim of `450.
At the end of the first half-year, the following information is gathered from the “Account
Sales” sent by the consignee:
(i) Sale proceeds:1,500 1 kg. tins

(ii) 4000 1/2 kg. packets

(iii) Store rent and insurance charges ` 600.
Find out the value of closing inventory on consignment.
Show the Consignment A/c and the Consignee’s A/c in the books of Vikram Milk Food
Co. Ltd. assuming that the consignee had paid the amount due from him.
Question 6

Shri Mehta of Mumbai consigns 1,000 cases of goods costing ` 1,000 each to Shri
Sundaram of Chennai. Shri Mehta pays the following expenses in connection with
consignment:
Carriage 10,000
Freight 30,000
Loading charges 10,000
Shri Sundaram sells 700 cases at ` 1,400 per case and incurs the following expenses:
Clearing charges 8,500
Warehousing and storage 17,000
Packing and selling expenses 6,000
It is found that 50 cases have been lost in transit and 100 cases are still in transit.
Shri Sundaram is entitled to a commission of 10% on gross sales. Draw up the Consignment
Account and Sundaram’s Account in the books of Shri Mehta.

Question 7
Ajay of Mumbai consigned to Vijay of Delhi, goods to be sold at invoice price which
represents 125% of cost. Vijay is entitled to a commission of 10% on sales at invoice price
and 25% of any excess realised over invoice price. The expenses on freight and insurance
incurred by Ajay were `10,000. The account sales received by Ajay shows that Vijay has
effected sales amounting to `1,00,000 in respect of 75% of the consignment. His selling
expenses to be reimbursed were ` 8,000. 10% of consignment goods of the value of `12,500
were destroyed in fire at the Delhi godown. Vijay remitted the balance in favour of Ajay.
Prepare consignment account and the account of Vijay in the books of Ajay along with the
necessary calculations