"You will can get notification in to your G mail ,when we are upload our new article . so you can follow this blog site. you can see "blank line" on the top line of the blog page, type your gmail and then submit. "

Consignment account

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. For example, Consignment to David, Consignment to John, Consignment to Ottawa and consignment to New York etc.

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 commission at 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.

Format and example

Example 1

In this example, consignor sends goods to Mr. James who is located in Ontario city. The consignee’s name in account title distinguishes this consignment account from others.

Example 2

This consignment is sent to Mukher Jee in Bombay city. The city name included in the account title distinguishes it from other consignments.

Journal entries in the books of consignee

In consignment, the status of consignee is that of a commission agent. His income is the commission which he receives from consignor for the sale of goods dispatched to him. He has no share in the consignment profit because he is not a business owner. Similarly, he is also not responsible for any loss incurred by the consignment business.

Any expenses incurred by the consignee in connection with the consignment are reimbursed to him.

Journal entries and ledger accounts in the books of consignee

Journal entries:

We will first discuss the journal entries in the books of consignee and then talk about the necessary ledger accounts. The common journal entries that a consignee makes in his books are given below:
1. Entry at the time of receiving goods:
No entry
The consignee holds goods on behalf of and on account of consignor. He does not make an accounting entry when he receives the goods consigned to him. He may however, keep the record of goods received in a separate book known as consignment inward book.
2. Entry at the time of making advance to the consignor:
(i). if payment is made in cash or via check or bank draft:
Consignor A/C [Dr]
Cash/Bank A/C [Cr]
(ii). If a bill is accepted as a mode of advance payment:
Consignor A/C [Dr]
Bill payable A/C [Cr]
3. Entry at the time of making payment for consignment related expenses:
Consignor A/C [Dr]
Cash/Bank A/C [Cr]
4. Entry at the time of sale of goods:
(i). If goods are sold for cash:
Cash/Bank A/C [Dr]
Consignor A/C [Cr]
(ii). If goods are sold on credit
See del credere commission and credit sales article
5. Entry for recording commission income:
Consignor A/C [Dr]
Commission received A/C [Cr]
6. Entry at the time of sending remittances:
Consignor A/C [Dr]
Cash/Bank A/C [Cr]
7. Entry to close commission received account to profit and loss account:
Profit and loss A/C [Dr]
Commission received A/C [A/C]

Points to remember:

At the end of the accounting period, if consignor’s account shows a debit or credit balance, it should be presented in the balance sheet. Debit balance is shown as sundry debtors under the head current assets where as credit balance is shown as sundry creditors under the head current liabilities.
No entry regarding the stock on consignment is passed in the books of consignee. As mentioned earlier, the consignee just holds the stock; the ownership to goods rests with the consignor.
The consignee does not calculate profit or loss on consignment.
The commission received account in the books of consignee is closed to the profit and loss account at the end of the year. It is done by making the journal entry 7 given above.

Ledger accounts:

The two ledger accounts that are important in the books of consignee are consignor account and commission received account. The consignor account is a personal account in nature. It tells consignee what balance is due to the consignor after deducting his commission and expenses from the sales proceeds. The commission received account is used to keep a record of the commission income earned from consignment. Consider the following example:

Example

Ahmad & Co. of Sialkot Consigned goods costing Rs 75,000 to Nasir & Co. of Karachi. Ahmad paid the following expenses:
Loading charges: Rs 1,500
Insurance: Rs 1,000
Freight: Rs 5,000
Nasir & Co. received the delivery and transported the same to a rented godown. T paid the following expenses in respect of consignment:
Unloading charges: Rs 1,000
Carriage: Rs 2,000
Godown rent: Rs 2,500
On the same day, Nasir sent a bank draft of Rs 37,500 to Ahmad as advance against consignment.
Nasir sold all the goods for Rs 100,000. His commission was 10% on gross sale proceeds. He paid the balance due via bank draft.
Required: Prepare journal entries and ledger accounts in the books of consignee.

Solution

Journal entries in the books of consignee:

Ledger accounts in the books of consignee:

Valuation of closing stock on consignment

Definition and explanation

A consignor may have some incomplete consignments at the end of his accounting year. An incomplete consignment means that there are some unsold units of goods with the consignee when the accounting period of the consignor comes to an end. These unsold units are termed as closing stock on consignment (or just stock on consignment for short) and need to be properly valued. After valuation, the stock on consignment must be brought into the books and credited to the consignment account so that the profit earned on consignment during the period can be computed correctly. The journal entry for this purpose is given below:
Stock on consignment A/C [Dr]
Consignment A/C [Cr]
The stock on consignment is an asset and is, therefore, shown on the year end balance sheet. In the next accounting period when consignment account is prepared, this stock appears as the first item on the debit side of this account. The following journal entry is made for this purpose:
Consignment A/C [Dr]
Stock on consignment A/C [Cr]

Valuation of stock on consignment

The stock on consignment, like in many other business situations, should be valued using lower of cost or market price principle. The major issue in this regard is the ascertainment of cost price and market price of goods in stock. The rest of this article talks about the procedures of determining these two prices. Let’s start with the cost price.

Cost price

The total cost of goods is equal to the expenditures incurred by consignor to bring the goods in salable condition plus all the expenditures paid by consignor as well as consignee in the course of transferring those goods to the consignee’s place. These expenditures usually include carriage, freight, insurance, import and export duties, loading and unloading expenses etc. These expenditures are popularly referred to as non-recurring expenditures.
Any expenditures incurred after the goods have reached to the consignee’s place should be ignored for the purpose of computing the value of closing stock on consignment. Usual examples of such expenditures include warehouse rent, warehouse insurance, storage expenses, carriage paid for the delivery of goods to customers, marketing expenses or any other payment made for the sale of goods.

Net realizable value (NRV)/market price

Net realizable value (NRV) of stock is determined by deducting from the market price of stock the possible expenses required to complete the sale of stock including consignee’s commission. Suppose, for example, 100 units of product X are in stock with a consignee and the sales price of one unit of product is $20. The total sales or market price of this stock would be $2,000 (= 100 units × $20). Now if the estimated expenses required to sell this stock are $300 and consignee’s commission on sale is $200, the net realizable value of stock would be $2,000 (= $2,500 – $500).
After computing the cost price and net realizable value (NRV) in accordance with the procedures explained above, the smaller one should be used as the value of closing stock. If no indication regarding the market price or net realizable value is available in an examination problem or a homework assignment, the students should assume that the cost price is lower than the net realizable value. The valuation of stock on consignment should therefore be done on the basis of cost price.

Formula and format for computing closing stock on consignment

For cost price

If cost price method is applicable, the students should follow the following format for computing the value of closing stock:
After computing the total cost using above format, the following formula can be used to find the value of stock on consignment:
Cost of stock on consignment = (Total cost/Total number of units) × Units in stock
Alternatively, the value of stock can also be computed as follows:

For net realizable value (NRV)

If net realizable value method is applicable, the following formula should be used to compute the value of stock on consignment.
Net realizable value = Market price of stock – (Expected expenses to be incurred to sell the stock + Consignee’s commission)

Example 1 – valuation using cost price

This example illustrates a situation where we need to take the cost of stock as the value of closing stock on consignment.
On June 1, 2020, Robert & Co. of Mexico consigned 10,000 units of goods to Peter & Co. of Ottawa at a cost of $80 per unit. Robert & Co. paid the following expenses:
Loading and unloading charges: $160
Carriage: $180
Insurance: $100
Freight: $150
The following expenses were paid by Peter & Co. on behalf of Robert & Co:
Loading and unloading charges: $170
Import duty: $135
Carriage for delivering goods to consignee’s warehouse: $185
Selling and marketing expenses: $110
Warehouse rent: $125
The consignee’s commission was 5% on gross sale proceeds
On December 31, 2020, Peter & Co. sent an account sales to Robert & Co. sowing that 8,000 units were sold at a price of $110 per unit and 2,000 units remained unsold. The Robert & Co. prepares its profit and loss account and balance sheet on December 31 each year.
Required: Compute the value of closing stock on consignment on December 31, 2020.

Solution

Valuation of closing stock on consignment

Stock on consignment = ($801,100/10,000 units) × 2,000 units
= $160,220
Note: The selling and marketing expenses of $110 and warehouse rent of $125 paid by consignee have not been taken into account while determining the value of stock on consignment because these two expenses have been incurred after the goods have reached to the consignee’s place or warehouse.

Example 2 – valuation using net realizable value

This example illustrates a situation where we need to take the net realizable value of stock as the value of closing stock on consignment.
On March 1, 2019, David Bro. of Mumbai shipped to John Bro. of Alaska 1,000 units of a hunting tool costing $50 each. David Bro. incurred the following expenses for this shipment:
Cartage: $75
Freight: $250
Insurance: $300
The following charges were paid by John Bro:
Landing charges: $150
Storage charges: $350
Fire insurance premium on stock: $270
On December 31, 2019, an account sales was received from John Bro. revealing that 700 units were sold at $150 each.
Suddenly a new hunting tool appeared in the market towards the close of the year and it became impossible to sell the remaining 200 units at high price. The market price of the tool fell down to $45 per unit. The john bro. deducted all the expenses they paid in connection with the consignment and also charged a commission at an agreed rate of 10% on total gross sale proceeds.
A bank draft for the balance due was attached with the account sales.
Required:
Find out the value of closing stock on consignment.
Prepare a journal entry to bring the stock on consignment into books of David Bro.
Prepare consignment to john account in the books of David Bro.

Solution:

1. Valuation of stock on consignment:

(i). Stock on consignment = ($50,770/1,000 units) × 200 units
= $10,154
(ii). Market price of stock – Consignee’s commission @ 10%
= (200 units × $35) – $700*
= $7,000 – $700
= $6,300
*7,000 × 10%
The net realizable value of stock ($6,300) is less than its cost ($10,154). The value of closing stock on consignment is, therefore, $6,300.
Note: The storage charges of $350 and fire insurance premium of $270 paid by consignee have not been taken into account while determining the value of stock on consignment because these two expenses have been incurred after the goods have reached to the consignee’s place or warehouse.

2. Journal entry

3. Consignment to John account

Del credere commission and credit sales

Definition and explanation

Del credere commission is related to credit sales. It is a type of commission which a consignor offers to the consignee who guarantees the collection of payment from credit customers. It is different from the consignee’s ordinary commission and works like a credit insurance to consignor in the event a customer becomes insolvent or fails to make payment due to some other reason. In consignment account, del credere commission appears on the debit side along with the ordinary commission allowed to the consignee.

Calculation of del credere commission

Del credere commission is paid to the consignee in addition to his ordinary commission. It is usually computed at a certain pre-agreed percentage of total gross sale proceeds. For example, the cash sales are $5,000 and credit sales are $2,500. If an ordinary commission of 10% and a del credere commission of 5% are allowed to consignee, the two types of commission would be computed separately as follows:

Ordinary commission = ($5,000 + $2,500) × 0.1
= $750

Del credere commission = ($5,000 + $2,500) × 0.05
= $375

The computation of del credere commission is similar to the computation of ordinary commission. However, the consignor and consignee may sign a separate agreement regarding the calculation and payment of del credere commission.

Students should remember the following two points:

if del credere commission is not paid to the consignee, the consignor will bear the losses resulting from consignment related bad debts.
if del credere commission is paid to the consignee, the consignee will bear the losses resulting from consignment related bad debts.

Entries related to credit sales

(1). When a del credere commission is not given to consignee

Entries in the books of consignor:

(1). At the time of credit sales:

Consignment debtors A/C [Dr]
Consignment A/C [Cr]

(2). At the time of collection of debtors:

Cash/Bank A/C [Dr]….Collection by consignor
Consignee A/C [Dr]…..Collection by consignee
Consignment debtors A/C [Cr]

(3). Entry for bad debts/discount allowed:

Bad debts/Discount allowed A/C [Dr]
Consignment debtors A/C [Cr]

(4). At the time of closing bad debts/discount allowed account:

Consignment A/C [Dr]
Bad debts/Discount allowed A/C [Dr]

Entries in the books of consignee

(1). At the time of credit sales:

No entry

(2). At the time of collection of debtors:

Cash/Bank A/C [Dr]
Consignor A/C [Cr]

(3) Entry for bad debts:

No entry

(2). When a del credere commission is given to consignee

Entries in the books of consignor

(1). When credit sales are made

Consignee A/C [Dr]
Consignment A/C [Cr]

(2). Entry for bad debts:

No entry – when del credere commission is allowed to the consignee, the consignor has nothing to do with bad debts.

(3). For consignee’s ordinary and del credere commission:

Consignment A/C [Dr]
Consignee A/C [Cr]

Entries in the books of consignee

(1). When credit sales are made:

Consignment debtors [Dr]
Consignor A/C [Cr]

(2). At the time of collection of debtors:

Cash/Bank [Dr]
Consignment debtors [Cr]

(3). Entry for bad debts:

Bad debts A/C [Dr]
Consignment debtors A/C [Cr]

(4). Entry for closing bad debts account

Consignee adjusts the amount of bad debts against his commission from consignment. The bad debts are debited to the commission received account. At the end of the year, the net balance of commission received account is transferred to the profit and loss account. This is done by means of the following two journal entries:

i. The following entry closes the bad debts account to commission received account:

Commission received A/C [Dr]
Bad debts A/C [Cr]

ii. The following entry closes the commission received account to profit and loss account:

Profit and loss A/C [Dr]
Commission received A/C [Cr]

credere commission

On 1st October 2020, Kim of Manchester consigned goods costing $50,000 to Harry of Bristol. Kim paid $120 as railway freight and $150 as insurance. On 31 December 2020, an account sales was received from Harry showing that all the goods were sold for $75,000 – out of which, $20,000 were sold on credit. Harry paid $115 as carriage and $125 as storage expenses.
A credit customer who purchased goods for $2,500 did not make payment and the debt proved bad. All other payments were successfully collected by Harry. The Harry was entitled to an ordinary commission of 10% on gross sale proceeds. A cross check was enclosed with the account sales for the balance amount.
Required:
Draw up necessary ledger accounts in the books of Kim and Harry using above information.
Disregard the requirement 1 and refer to the original information. Draw up necessary ledger accounts in the books of Kim and Harry assuming the Harry is given a 5% del credere commission (in addition to his ordinary commission). Other things remaining the same.

Solution

1. Where no del credere commission is given to Harry:

In the books of Kim (the consignor)
In the books of Harry (the consignee)

2. Where a del credere commission is given to Harry

In the books of Kim (the consignor)
In the books of Harry (the consignee)

Advance on consignment made by consignee

Advance on consignment is the amount which a consignee sends to the consignor in advance, either as security against goods received or as investment assistance for consignor. The amount is sent in the form of cash, check or a bank draft in favor of consignor. Alternatively, the consignee may also accept a bill of exchange drawn by the consignor on him for this purpose.

Where the consignee sends advance, the amount of advance is adjusted against the proceeds due from him. The method of such adjustment highly depends upon the purpose for which the consignor asks for the advance payment from consignee. The procedure is discussed and exemplified below.

Where the purpose of advance is not the security of goods

Where the purpose of advance is not the security of goods, the full amount of advance is adjusted against the amount due from consignee, even if some stock remains unsold with the consignee at the end of the period. The journal entries in this regard are made as follows:

In the books of consignor

1. Journal entry at the time of receiving advance from consignee:

Cash/Bank/Bill receivable A/C [Cr]
Advance against consignment A/C [Dr]

2. Journal entry for adjusting the amount of advance at the end of the period:

Advance against consignment [Dr] – With full amount of advance
Consignee [Cr]