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Summary of Accounting Entries

The document discusses accounting entries related to consignment transactions from the perspective of both the consignor and consignee. It explains that the consignor retains ownership of goods sent on consignment and various entries recorded for expenses, advances, sales, commissions and remittances between the two parties. Key terms related to consignment such as pro-forma invoice, account sale, direct/indirect expenses and valuation of unsold stock are also summarized.

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153 views7 pages

Summary of Accounting Entries

The document discusses accounting entries related to consignment transactions from the perspective of both the consignor and consignee. It explains that the consignor retains ownership of goods sent on consignment and various entries recorded for expenses, advances, sales, commissions and remittances between the two parties. Key terms related to consignment such as pro-forma invoice, account sale, direct/indirect expenses and valuation of unsold stock are also summarized.

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ABINASH
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Summary of Accounting Entries

Following Accounting Entries (Except for Loss) will be done in the books of
consignor and consignee for transactions related to the consignment −

Sr.No In the Books of Consignor In the Books of Consignee


.

1 When goods are sent to the


consignee

Consignment A/c Dr No need to do any Entry in this


case
To Goods Sent on Consignment A/c

(Being Goods Sent on Consignment)

2 Expenses Incurred by Consignor

Consignment A/c Dr

To Cash/Bank A/c Not Applicable

(Being Expenses incurred on


consignment)

3 Advance given by consignee


Consigner A/c Dr
Cash/Bank A/c Dr
To Bank/Cash A/c
To Consignee’s A/c
(Being Advance amount paid to
(Being advance received from
Consignor)
consignee)

4 Expenses Incurred by Consignee Consigner A/c Dr

Consignment A/c Dr To Bank/Cash A/c

To Consignee’s A/c (Being Expenses incurred on


goods received on
(Being Expenses incurred by
consignment)
consignee)

5 Sale by Consignee Cash (for cash sale) A/c Dr

Consignee’s A/c Dr Debtors (for Credit Sale) A/c


Dr
To Consignment A/c
To Consignor A/c
(Being Sale by consignee)
(Being goods sold)

6 Commission to Consignee

Consignment A/c Dr Consigner A/c Dr

To Consignee’s A/c To Commission A/c

(Being Commission on sale due to (Being Commission earned)

consignee)

7 Remittance from Consignee


Consigner A/c Dr
Cash/Bank A/c Dr
To Bank/Cash A/c
To Consignee’s A/c
(Being Balance due Payment
(Being due amount received from
made to consignor)
consignee)

8 Entry for Profit on Consignment

Profit & Loss A/c Dr


Not Applicable
To Consignment A/c

(Being Profit earned on consignment)

9 Loss on Consignment Not Applicable

Consignment A/c Dr
To Profit & Loss A/c

(Being Loss incurred on Consignment


transferred to the profit & Loss
Account)

Note − The goods sent on consignment account will be closed by


transferring balance into the Purchase account or the Trading account.

Due to increasing size of market, it is quite obvious that manufacturers or


whole sellers cannot approach directly to every customer around the state
or nation. To overcome this limitation, manufacturers normally appoint
reliable agents at every desired location to reach the customers directly. He
makes an agreement with local traders who can sell goods on his behalf on
commission basis.

Meaning and 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).

Why is 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.

Important Terms
Pro-forma Invoice
Invoice implies that the sale has taken place, but pro-forma invoice is not
an invoice. Proforma invoice is a statement prepared by the consignor of
goods showing quantity, quality, and price of the goods. Such pro-forma
invoice is issued by the consignor to consignee regarding the goods before
the sale actually takes place.

Account Sale
Statement showing the details of goods received, goods sold, expenses
incurred, commission charged, remittances made, and due balance is called
Account Sale and it is remitted by the consignee to the consignor of goods
on a periodic basis.

Commission
There are three types of commission payable to consignee on sale of the
goods −

 Simple Commission − This is usually a fixed percentage on the total sale,


calculated as per mutually agreed terms.
 Over-riding Commission − In case of an extra-ordinary sale of the goods,
some specific amount is payable to consignee in the form of an incentive is
called overriding commission. Over-riding commission is also calculated on the
total sales.
 Del-credere Commission − “An agreement by which an agent or factor, in
consideration of an additional premium or commission (called a del credere
commission), engages, when he sells goods on credit, to insure, warrant, or
guarantee to his principal the solvency of the purchaser, the engagement of the
factor being to pay the debt himself if it is not punctually discharged by the
buyer when it becomes due.”

C. & G. Merriam Co.

A del credere commission is paid by the consignor to his agent for taking
additional risk of recovery of debts from the consignee on an account of
credit sales made by him (agent) on consignor's behalf.

Direct Expenses
Expenses, which increases the cost of the goods and are of non-recurring
nature and incurred till the goods reach the warehouse of consignee may
called direct expenses.

Indirect Expenses
Warehouse rent, storage charges, advertisement expenses, salaries, etc.
comes under the category of the indirect expenses. The distinctions
between direct and indirect expenses are important especially at the time of
valuation of the unsold closing stock.

Advance
Amount paid in advance by a consignee to consigner as security called as
advance.

Valuation of unsold Consignment


Valuation of unsold stock will be done like a closing stock of a Trading
concern and should be valued at the cost or the market price whichever is
low. This stock will be valued at −

 Proportionate cost price and

 Proportionate direct expenses.

Here, proportionate direct expenses mean — all expenses incurred by the


consignor and the expenses of consignee, which are incurred by him till the
goods reach the warehouse.
Invoicing Goods higher than Cost
Under this method, goods are charged at the cost + profit and the pro-
forma invoice also shows this higher price of such goods. To know the
actual profit, at the end of an accounting period, consignment account will
be credited with excess price so charged. Value of the stock will also be
adjusted to the extent of profit element. Main reason to adopt this policy by
consignor is −

 To hide actual profit from consignee.


 Valuation of a stock at the consignor’s warehouse is comparatively easy in this
case.
 In this case, consignor usually directs consignee to sale goods on invoice price
only. It prevents different sale price to different customers.

Loss of Goods
There may be two types of losses as explained below −

Normal Loss − Normal loss may occur due to inherent characteristics of


goods like evaporation, drying up of goods, etc. It is not separately shown
in the consignment account, but included in the cost of goods sold and the
closing stock by inflating the rate per unit. To calculate the value of unsold
stock, following formula is used.

Value of Closing Stock =

(Total Value of Goods Sent / Net Quantity Received by Consignee) x


Unsold Quantity

Abnormal Loss − An abnormal loss may occur due to any accidental


reason. It is credited to the consignment account to calculate actual
profitability. Valuation of closing stock is done on the same basis as
explained earlier i.e. proportionate cost + proportionate direct expenses.

Abnormal Loss and Insurance


If, there is an insurance policy in respect of the consigned goods; following
entries will be passed in the books of a consignor −
Sr. In the Books of Consignor In the Books of Consignee
No
.

1
Payment of Insurance Premium
Consignment A/cDr
(a) If insurance premium is paid by
To Cash A/c
the consignor, then cash will be
credited. Or

(b) If Insurance premium is paid by To Consignee A/c


the consignee, then consignee’s A/c
(Being Insurance premium paid)
will be credited.

2
Abnormal Loss A/c Dr

At the time of Abnormal Loss To Consignment A/c

(Being Loss Incurred)

3
Insurance Company (Name of the
insurer) A/c Dr
Acceptance of Claim by
Insurance Company To Abnormal Loss A/c

(Being claim admitted)

4
Bank A/c Dr

On receipt of Claim To Insurance Company A/c

(Being amount of claim received)

5
Profit & Loss A/c Dr

To Abnormal Loss A/c


In Case of Loss
(Being amount of Abnormal Loss
transferred)

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