Consignment Accounts

Consignment happens when goods are sent by their owner to an agent. owner is called consignor and agent is called consignee. consignee undertakes the responsibility to sell the goods. The accounting related to this process is called consignment accounts.

Consignment Accounts – Initial Transfer of Goods

When consignor sends the goods to the consignee there is no need for consignor to record an entry related to movement of goods. It is sufficient to record the change in the physical location, as ownership of goods belong to consignor and not to consignee.

Consignor need to follow some maintenance activities:-

  • Consignor need to send a statement to consignee over a fixed time repeatedly stating goods which are on consignee’s premises. the consignee can use this statement to check the status of inventory and pay for the dues to the consignor.
  • Request statement regarding goods left over consignee’s premises from consignee at the end of each accounting period.

Consignee do not need to keep the record of consigned inventory. Since inventory is owned by consignor however it maybe useful for consignee to keep a separate record of inventories for reconciliation purposes.

Consignment Accounts – Sale of Goods by Consignee

When consignee sells the good it gives a prefixed amount to consignor. The consignor records the amount with a debit to cash and credit to sales.

Depending upon their arrangement a consignor may pay a commission to consignee for making a sale. If so this is a debit to commission expense and credit to accounts payable.

A sale triggers a payment to the consignor for consigned goods that were sold.

Parties in Consignment Accounts

There are 2 parties in a consignment:-

  1. Principal or person sending goods also known as consignor.
  2. Agent or person who receive the goods also known as consignee.

Accounting treatment in the Books of Consignor

The relationship between consignor and consignee is that of the principal and the agent. So entire profit or loss belongs to the consignor and consignee receives the commission in return for his services.

On the consignment of goods consignor also sends the performa invoice to the consignee. When consignee remits money he also sends accounts sale to the consignor.

Normal and Abnormal loss

Normal loss

The normal loss means a loss which cannot be avoided, It should be considered while valuing the closing stock.

To calculate the cost per unit after the normal loss, we use the following formula:

Cost per unit=Total cost+ expenses incurred/Total quantity–Normal loss

In consignment, the normal loss is ignored which means its value is absorbed by remaining good units in the stock. For example, A consigns 1,000 units of goods costing $9,500 to B. The per unit cost of consignment is $9.5. Suppose a normal loss of 50 units occurs and consignee receives 950 units. The increased per unit cost after normal loss would be $10 (= $9,500/950 units) and the stock on consignment would be valued using this new unit cost.

Calculation of stock on consignment

= (Value of goods before normal loss/Quantity received after abnormal loss) × Unsold stock

Abnormal Loss

The abnormal loss is avoidable in nature and generally arises due to reasons like fire, theft, accident or flood etc. The value of abnormal loss is charged to profit and loss account. The consignment account, in fact, is given a credit for the value of abnormally lost units so that true profit or loss can be computed.

The abnormal loss is generally handled using one of the two methods discussed below:

Method 1

  1. Journal entry if the goods are not insured:
  • Profit and loss A/C [Dr]
  • Consignment A/C [Cr]
  1. Journal entry if the goods are fully insured:
  • Insurance claim A/C [Dr]
  • Consignment A/C [Cr]
  1. Journal entry if the loss is more than the compensation given by insurance company:
  • Profit and Loss A/C [Dr]
  • Insurance claim A/C [Dr]
  • Consignment A/C [Cr]
  1. Journal entry when the amount of claim is received from insurance company:
  • Bank A/C [Dr]
  • Insurance claim [Cr]

Method 2

Under second method, the abnormal loss is dealt through a special account known as “abnormal loss account”. When abnormal loss occurs, its entire value is transferred to abnormal loss account. The journal entries under this method are as follow

  1. Journal entry to transfer the loss to abnormal loss account:
  • Abnormal loss A/C [Dr]
  • Consignment A/C [Cr]
  1. Journal entry to close the abnormal loss account if goods are not insured:
  • Profit and loss A/C [Dr]
  • Abnormal loss A/C [Cr]
  1. Journal entry to close the abnormal loss account if goods are fully insured:
  • Insurance claim A/C [Dr]
  • Abnormal loss A/C [Cr]
  1. Journal entry if the loss is more than the compensation given by insurance company:
  • Profit and Loss A/C [Dr]
  • Insurance claim A/C [Dr]
  • Abnormal loss A/C [Cr]
  1. Journal entry when the amount of claim is received from insurance company:
  • Bank A/C [Dr]
  • Insurance claim [Cr]

Formula for calculation of abnormal loss

For computing the value of abnormal loss, we first need to compute the total cost of goods just before the occurrence of abnormal loss. It is done as follows:

Cost of goods sent by consignor:- XXXX Add: Non-recurring expenses paid by consignor and consignee before abnormal loss:- XXXX Total cost before abnormal loss:- XXXX

After the total cost of goods just the before abnormal loss has been obtained using above using above format, the value of abnormal loss can be ascertained by applying the following formula:

Value of abnormal loss = Total cost before abnormal loss/ Total quantity in unites * Units lost

Valuation of Unsold Stock

Where all the goods have not been sold, it becomes necessary to value the unsold goods. The stock lying in the hands of consignee at the end of accounting year is valued at cost or market price whichever is less. If all the goods are not sold by the Consignee within the accounting period, then the unsold stock is brought into account by the Consignor. The cost of unsold stock or closing stock should be valued at cost to the consignor plus proportionate non-recurring expenses incurred by the consignor and consignee. As usual, the unsold stock in the hands of the consignee should be valued on cost price or market price whichever is less. The consignment stock account is an asset and will be shown in the balance sheet.

Calculation of Value of Unsold Stock: It is calculated as follows:

(a) The proportionate Cost Price and

(b) Proportionate direct expenses i.e. the expenses incurred by the Consignor and Consignee till the goods reached the godown of the Consignee.

The following method should be carefully considered while valuing unsold stock:

Cost Price Of Goods Consigned……………………………XXX

Add: Expenses incurred by consignor

  • Freight – “XXX”
  • Carriage – “XXX”
  • Insurance on goods dispatch – “XXX”
  • Docks dues – “XXX”
  • Export/Import duties – “XXX”
  • Loading and unloading charges – “XXX”

Add: Consignee’s expenses

  • Unloading charges – “XXX”
  • Landing charges – “XXX”
  • Import duty – “XXX”
  • Octroi – “XXX”
  • Rent – “XXX”
  • Total Cost – “XXX”

Cost of unsold stock = (Total Cost/Total Quantity) X Unsold Quantity

Alternative Method, The cost of stock implies the value at which goods are consigned by the consignor to the consignee.

Cost Of Unsold Stock = (Cost of goods sold+Proportionate of all expenses/Total Quantity) X unsold stock.

The value of stock includes all the expenses incurred before bringing it into usable condition.

Value of unsold stock = Cost Price of Closing Stock + Proportionate non-Recurring Expenses.

Formula: Calculation of Value of Unsold Stock

It is calculated as follows:-

(a) The proportionate Cost Price and

(b) Proportionate direct expenses i.e. the expenses beared by the Consignor and Consignee till the goods reached the godown of the Consignee.

Expenses incurred by the Consignee after the goods have been brought to the shop/godown are not considered. Correct profit or loss can be ascertained by the proper valuation of unsold stock which is credited to Consignment Account.

Value of unsold stock = Cost Price of Closing Stock + Proportionate non-Recurring Expenses

Practice Questions.

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