Consignment

Consignment

Nature of a consignmentIf 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.

ConsignorThe owner of the goods who sends the goods to an agent for sale.ConsigneeWho 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 consignmentGoods 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.

Consignors BooksConsignment accountIt is a profit and loss account for the consignment.Consignment AccountExpensesIncome

2. Consignee accountConsignee AccountAmount owing form consignee e.g. SalesAmount owing to consignee e.g. Expenses, commission

3. Goods sent on consignment accountGoods sent on consignment accountTransferring to trading accountCost of goods sent

4. Summary of procedures

TransactionsDouble entries1. Goods sent on consignmentDr ConsignmentCr Goods sent on consignment2. Expenses incurred by the consignor.Dr ConsignmentCr Bank3. Expenses incurred by the consignee and the commission payable to the consignee.Dr ConsignmentCr Consignee4. Sales recorded on the account salesDr Consignee Cr Consignment

5. Normal lossNormal loss of stock of the consignment which was not insured. (Normal loss: damaged stock, obsolete stock)No entry6. Insurance claim received for normal stock lossDr BankCr ConsignmentAbnormal lossAbnormal stock loss credited to consignment account. (Abnormal loss: fire loss, burglary loss, stolen in transit)Dr Bank/Insurance companyDr Profit and LossCr Consignment(Total loss)8. Payment from the consignee by cheque or billDr Bank/Bills receivableCr Consignee9. Cost of goods sent on consignment credited to trading account.Dr Goods sent on consignmentCr Trading account10. Profit on the consignment is transferred to the profit and loss account. (Reverse the entries if it is a loss.)Dr ConsignmentCr Profit and loss

Goods sent on consignment account $Trading x

$Consignment x

Consignment $Goods sent on consignment xBanks-consignors expenses xConsignee- consignees

expenses x consigneescommission xP & L-profit on consignment x

x $4. Consignee-sales x6. Bank/Insurance Co.-claim x6. Bank/Insurance Co.-claim x7. Profit and Loss-net stock loss x

_ x

Consignee $Consignment-sales x

_ x $3. Consignment-consigneesexpenses x consigneescommission x8. Bank-settlement fromconsignee 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 ConsignmentsA consignee(agent) sells goods and collects money on behalf of the consignor.If he cant collect the debts, these debts should be treated as the bad debts of the consignor.

Accounting entries in the books of the consignor:Dr ConsignmentCr Consignee

Consignment $Consignee-bad debts xConsignee $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 consigneeDr Bad debtsCr Debtors(with the bad debts borne by the consignee personally)

Valuation of stockIf 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 1Balance c/d value of unsoldstock x x $Year 1

x xYear 2Balance b/d x

Valuation of stock = Consignors Cost +Consignees Expenses

Consignors cost= Total consignors cost * Units of closing stock / Total units of goods SENT on consignment= [Cost of goods on consignment + Consignors expenses] * Units of closing stock / Total units of goods SENT on consignment

Consignees 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, salesmens salaries, bad debts, discounts allowed, delivery charges(to customers), selling expenses, distribution expenses.

Example

ConsignmentGoods on Consignment 60,000Bank - freight 500 - insurance 200Chan sales 94,000 (500+440)*$100Chan 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%) $

WorkingsValue of the stock loss (10 boxes)Stock loss = (1,000 * $60 + $500 +$200) * 10/1,000 = $607

ConsignmentGoods on Consignment 60,000Bank - freight 500 - insurance 200Chan sales 94,000 (500+440)*$100Chan 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%) $Bank claim 300Profit and Loss stock loss 307 (607-300)

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

ConsignmentGoods on Consignment 60,000Bank - freight 500 - insurance 200Bank claim 300Profit and Loss stock loss 307 (607-300)Chan sales 94,000 (500+440)*$100Chan 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 onconsignment 27,642 $ $97,742 97,742

Chan $

Consignment - sales 94,000Consignmentport charges 700delivery changes to

warehouse 1,280advertising 1,000delivery charges to

customers 900 dis. allowed 320ordinary com. 4,700del credere com. 500

Bank 84,60094,00094,000$

Consignees booksA 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

TransactionsDouble entries1. Goods received form consignor.No entry2. Expenses paid by the consignor.No entry3. Commission received (ordinary and del credere commission).Dr ConsignorCr Commission Received4. Expenses paid on behalf of the consignor.Dr ConsignorCr Bank5. Discounts allowed to customers/Dr ConsignorCr Debtors

6. Bad debts borne by the consignor.Dr ConsignorCr DebtorsBad 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 DebtCr Debtors8. Cash salesDr Bank/CashCr Consignor9. Credit salesDr DebtorsCr Consignor10. Payment to the consignor by cheque or billDr ConsignorCr Bank/Bill payable

Consignor Account $Bank consignees expenses xCommission Received x- ordinary x- del credere xDebtors dis. allowed xDebtors bad debts xBank / Bill payable to consignor x x $Bank sales xDebtors sales x

_ x

ExampleThe facts are the same as in the pervious example, but thetransaction would be shown in the books of consignee.

Tang Consignor AccountBank -port charges 700 -delivery changes to warehouse 1,280 -advertising 1,000 -delivery charges to customers 900 94,00094,000$In Chans Books$Commission Receivedordinary 4,700 Del credere 500

Bank to consignor 84,600 Debtor sales (500 x $100) 50,000 Bank sales (440 x $100) 44,000

Further Considerations

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

Trading and Profit and Loss AccountOpening Stock NAdd Purchases T Less Goods on Consignment C N NLess Closing Stock NCost of Goods Sold NGross Profit N NExpenses NStock Loss of Consignment CNet Profit T TT$In Consignors Book$Sales N $ NGross Profit NConsignment Profit CN=figure from normal trading; C=figure from ConsignmentT= Total figures

Current AssetsStock (N+C) TConsignee Account(if it is a debit balance) C$$Balance Sheet (Extract)Current Liabilities

Consignee Account(if it is a credit balance) COR

Trading and Profit and Loss AccountOpening Stock NPurchases N N Less Closing Stock NCost of Goods Sold NGross Profit N NExpenses NBad Debts NBad Debts (If he has received a del credere commission, he will bear theConsignments bad debts) CNet Profit T TT$$Sales N $ NGross Profit NCommission Received(from consignor) CIn Consignees BookThe only entries needed is for the commission received.

Current AssetsStock NConsignor Account(if it is a debit balance) C$$Balance Sheet (Extract)Current Liabilities

Consignor Account(if it is a credit balance) COR

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 openedIf no consignment account is kept, all the transactions of the consignements should be recorded in the foint venture account.A consignemnt account is opened

Joint Venture Account $Bank joint venture expenses XBank consignment expenses incurred by the consignor XConsignee consignment expenses incurred by the consignee XProfit and Loss share of profit XBank settlement X $Bank joint venture sales XConsignee consignment sales XStock c/d unsold stock of joint venture and consignment X X(i) No consignment account is openedX

$Expenses joint venture and consignment XShare of Profit:A XB X X $Sales joint venture andconsignment XStock c/d joint venture and consignment X XMemorandum Joint Venture Account X

Joint Venture Account $Bank joint venture expenses XProfit and Loss share of profit XBank settlement X $Bank joint venture sales XGoods Sent on Consignment XConsignment profit XStock c/d unsold stock of joint venture only X X(ii) A consignment account is openedX

$Goods Sent on Consignment XBank expenses XConsignee expenses XJoint Venture consignment profit X $Sales joint venture only XGoods Sent on Consignment XConsignment profit XStock c/d joint venture only X XConsignment AccountX

$Expenses joint venture only XShare of Profit:A XB X X $Sales joint venture only XGoods Sent on Consignment XConsignment profit XStock c/d joint venture only X XMemorandum Joint Venture Account X