CONSIGNMENT ACCOUNTING- ALL YOU NEED TO KNOW

Consignment account is prepared to ascertain the profit earned or loss incurred by the consignor on a specific consignment. This account can be viewed as a combined trading and profit and loss account prepared specifically for consignment business.

The nature of the consignment account is nominal which means it is drawn up to show the results of the consignment business for a specific period.

If consignor sends goods to more than one consignees working in different cities or areas, a separate consignment account is required for each consignment so that the profit or loss for each consignment can be determined separately. If consignor maintains more than one consignment accounts, he can distinguish them from each other by adding to the account title the name of the consignee or the name of the city or area to which the particular consignment belongs.

Consignment accounting is a type of business arrangement in which one person sends goods to another person for sale on his behalf, and the person who sends goods is called the consignor. Another person who receives the goods is called the consignee; where the consignee sells the goods on behalf of the consignor on consideration of a certain percentage on sale.

 

 Features of Consignment

Consignment is a process under which the owner consigns/handovers his materials to his agent/salesman for the purpose of shipping, transfer, sale etc.

Following are the points that throw more light on the nature and scope of a consignment −

• Here, ultimate ownership of the goods remains with the manufacturer or whole seller who handovers goods to his agent for sale on commission basis. Consignment is merely a transfer of possession of goods not an ownership.
• Since ownership of goods remain with the manufacturer (consignor), consignee (agent) is not responsible for any loss or destruction of goods.
• The goods are sold on owner’s risk and hence, profit/loss goes to owner.
• Consignee only gets re-imbursement of expenses incurred by him and commission on sale made by him, because sale that proceeds, belongs to owner (consignor).

Consignment not a Sale:

Following are the reasons that explain why consignment is not a sale −

• Ownership− Ownership of goods need to be transferred from seller to buyer in case of sale, but ownership of goods remains with the consignor, till the goods are sold by the consignee.
• Risk− In case of a consignment, normally, risk remains with the consignor in the event of goods being lost or destroyed.
• Relationship− The relation between a seller and a buyer will be of debtor and creditor in case where goods are sold on credit basis. On the other hand, the relationship between a consignor and a consignee is that of principal and agent.
• Goods Return− Usually, the sold goods cannot be returned back; however, if there is any manufacturing defect or any other technical fault, seller is obliged to take them back. On the other hand, consignee may return the unsold stock of goods to consignor anytime.

Debit and credit entries in a consignment account

The entries in the consignment account are made on the basis of consignor’s own record as well as account sales sent by the consignee. The debit and credit entries are made as follows:

Debit entries

The common entries that appear on the debit side of a consignment account are listed below:

• Opening stock of goods (if any)
• Total cost of goods sent on consignment
• All the expenses incurred by consignor such as loading, freight, insurance etc.
• All the expenses paid by consignee such as unloading, freight, godwon rent, warehousing and storage, marketing expenses, packaging and selling expense etc.
• Bad debts regarding consignment sales.
• Consignee’s ordinary and del credere commissionat agreed rate on sale proceeds.

Credit entries

The usual items that appear on the credit side of a consignment account are listed below:

• Gross sale proceeds
• Closing stock of goods (if any)
• Abnormal loss of goods
• Stock in transit(if any)

The balance of consignment account represents a profit or a loss on consignment and is transferred to “Profit and Loss on Consignment Account“. The consignment account is thus closed.

The Profit and Loss on Consignment Account is also a nominal account. If there are more than one consignments, the balances of all consignment accounts are transferred to this account.

The profit and loss on consignment account is closed at the end of the year by transferring its balance to the General Profit and Loss Account.