Chapter 6 Consignment Sales

The Meaning of Consignments

The term consignment means transfer of possession of merchandise from
the owner to another person who acts as the sales agent of the owner.
Title to the merchandise remains with the owner, who is called a
consignor; the sales agent who has possession of the merchandise is
called a consignee.
The relationship between the consignor and the consignee is that of
principal and agent, and the law of agency controls the determination of
the obligations and rights of the two parties.
Consignees are responsible to consignors for merchandise placed in their
custody until it is sold or returned. Because consignees do not acquire
title to the merchandise, they neither include it in inventories nor record
trade accounts payable or other liability. The only obligation of
consignees is to give reasonable care to the consigned merchandise and
to account for it to consignors. When the merchandise sold by the
consignee, the resulting trade accounts receivable is the property of the
consignor.
The shipment of merchandise on consignment may be referred to by the
consignor as a consignment out, and by the consignee as a consignment
in.
Distinguishing between a Consignment and a Regular Sales
When merchandise is shipped on consignment:
 Title does not pass and the consignor continues to carry the
consigned merchandise as part of inventories
 No revenue is recognized by the consignor at the time of shipment
 The consignor is the owner of any unsold consigned merchandise
Why consignment sale is preferred from outright sales could be:
 The consignor may be able to persuade dealers to stock the items
on consignment basis than outright purchase

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  The consignor avoids the risk inherent in selling on credit to
dealers of questionable financial strength
 The acquisition of merchandise on consignment rather than by
purchase requires less working capital and avoids of the risk of
loss if the merchandise cannot be sold.
Accounting for Consignor and Consignee
Receipt of shipment
The consignee may record receipt of shipments in any of several ways:
 The objective is to create a memorandum record of the consigned
merchandise; no purchase has been made and no liability exists
 The receipt could thus be recorded:
o By a memorandum notation in the general journal
o By an entry in a separate ledger of consignment shipments
o By a memorandum entry in a general ledger account entitled
Consignment In- Selam PLC.
Illustration of the third alternative
Consignment In- Selam PLC
Date Explanation Debit Credit Balance
Received 10 TV sets to be sold
for 3,500 each at a
commission
of 10% of selling price

The journal entries to record the payment of freight costs and sales of the
merchandise by the consignee:
Consignment In- Selam PLC 500
Cash 500
To record payment of freight costs on shipment from consignor
Cash 35,000
Consignment In- Selam PLC 35,000
To record sales of 10 TV sets at 3,500 each

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The journal entry to record 10% commission earned
Consignment In- Selam PLC 3,500
Commission Revenue- Consignment Sales 3,500
To record 10% commission earned on TV sets sold
The remittance of cash to the consignor is recorded as debit to the
consignment ledger account and results in closing that account.
Consignment In- Selam PLC 31,000
Cash 31,000
To record payment in full to consignor

The Account Sales

The report rendered by the consignee is called the account sales; it
includes the quantity of merchandise received and sold, expenditures
made, advances made, and amounts owed or remitted. Payments may be
made as portions of the consigned merchandise are sold or may not be
required until the merchandise is sold or returned to the consignor.
Assume that Selam PLC, an importer and whole seller, ships 10 TV sets
to Ahmed Kedir, a retailer in Awasa to be sold at 3,500 rach. Freight
costs of 500 are to be reimbursed to Ahmed. Ahmed also receives a
commission of 10% of the selling price. After selling the merchandise
Ahmed sends Selam an account sales similar to the one below,
accompanied by a check for the amount due.

Ahmed Kedir

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 Awasa
Account Sales
Hamle 30, 1999
Sales for account and risk of:
Selam PLC
Addis Ababa

Sales: 10 TV sets @ Br. 3,500 35,000

Charges:
Freight cost 500
Commission (35,000*10%) 3,500 4,000
Balance (remittance to consignor) 31,000
Consigned TV sets on hand none

If merchandise is received on consignment from several consignors, a

Consignments-In controlling account may be used, and a supporting
account for each consignment set up in a subsidiary consignments
ledger.
If the consignee does not measure profits from consignment sales
separately from regular sales, the sale of the consigned merchandise is
credited to the regular sales account. Concurrently, a journal entry is
made debiting Cost of Goods Sold or Purchases and crediting
Consignment In ledger account for the amount payable to the consignor
viz. sales price minus commission. No journal entry is made for
commission revenue as the profit element is measured by the difference
between the amounts credited to sales and debited to cost of goods sold.
This method looks less desirable in that it does not clearly show gross
profit from consignment sales; but it is the most practical one as it treats
consigned merchandise as purchased upon sales there by facilitating

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collection of sales taxes like VAT by the consignee and issuance of the
consignee’s invoice to recognize the sales. The consignor also issues
invoice to the consignee to this effect.
Accounting for Consignors
When a consignor ships merchandise to consignees, it is essential to
have a record of this portion of inventories. Therefore, the consignor may
establish a Consignment Out account for every consignee (or every
shipment on consignment). The Consignment Out account represents a
special category of inventories.
Separate Measurement of Gross Profit
A separate measurement of gross profit on consignments becomes more
desirable if consignment transactions are substantial in relation to
regular sales as compilation of direct costs may be an expensive process,
especially if the gross profit is computed by individual consignees or
consignments.
Thus, a separation of consignment sales revenue from regular sales
revenue usually is a minimum procedure to develop information needed
by management if consignment sales are an important part of total sales
volume. However, separation of consignment sales from regular sales is
unnecessary if only an occasional sale is made through consignees.
Accounting for Consignor Illustrated
The choice of accounting method by a consignor depends on whether:
i) Consignment gross profits are measured separately from those
on regular sales?
ii) Sales on consignment are combined with regular sales?
Journal entries required under the two alternatives are illustrated by
taking the data used for the consignee; assume that the cost of TV sets
shipped to Awasa is 2,500 each.

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Upon shipment
The entry to be made under both alternatives would be:
Consignment Out-Ahmed Kedir 25,000

Inventories 25,000
Packing expenses of 300 allocated to consigned merchandise
Alternative i)
Consignment Out-Ahmed Kedir 300
Packing Expense 300
Alternative ii)
No entry required.
Consignment sales of 35,000 reported by consignee
Alternative i)
Cash 31,000
Consignment Out- Ahmed Kedir 500
Commission Expense- Cons Sales 3,500
Consignment Sales 35,000
Cost of Goods Sold 25,800
Consignment Out- Ahmed Kedir 25,800

Consignment sales 35,000

Less: Cost of Cons Sales 25,800
Commission 3,500 29,300
Gross profit on consignment sales 5,700

Alternative ii)
Cash 31,000
Freight Out Expense 500
Commission Expense 3,500
Sales 35,000

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 Cost of Goods Sold 25,000
Consignment Out- Ahmed Kedir 25,000

Included in total sales 35,000

Included in cost of all merchandise sold 25,000
Included in total packing expense 300
Included in total freight out expense 500
Included in total commission expense 3,500
If merchandise is received on consignment from several consignors, a
Consignments-In controlling account may be used, and a supporting
account for each consignment set up in a subsidiary consignments
ledger.
If the consignee does not measure profits from consignment sales
separately from regular sales, the sale of the consigned merchandise is
credited to the regular sales account. Concurrently, a journal entry is
made debiting Cost of Goods Sold or Purchases and crediting
Consignment In ledger account for the amount payable to the consignor
viz. sales price minus commission. No journal entry is made for
commission revenue as the profit element is measured by the difference
between the amounts credited to sales and debited to cost of goods sold.
This method looks less desirable in that it does not clearly show gross
profit from consignment sales; but it is the most practical one as it treats
consigned merchandise as purchased upon sales there by facilitating
collection of sales taxes like VAT by the consignee and issuance of the
consignee’s invoice to recognize the sales. The consignor also issues
invoice to the consignee to this effect.
Accounting for Consignors
When a consignor ships merchandise to consignees, it is essential to
have a record of this portion of inventories. Therefore, the consignor may
establish a Consignment Out account for every consignee (or every

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shipment on consignment). The Consignment Out account represents a
special category of inventories.
Separate Measurement of Gross Profit
A separate measurement of gross profit on consignments becomes more
desirable if consignment transactions are substantial in relation to
regular sales as compilation of direct costs may be an expensive process,
especially if the gross profit is computed by individual consignees or
consignments.
Thus, a separation of consignment sales revenue from regular sales
revenue usually is a minimum procedure to develop information needed
by management if consignment sales are an important part of total sales
volume. However, separation of consignment sales from regular sales is
unnecessary if only an occasional sale is made through consignees.
Accounting for Consignor Illustrated
The choice of accounting method by a consignor depends on whether:
iii) Consignment gross profits are measured separately from those
on regular sales?
iv) Sales on consignment are combined with regular sales?
Journal entries required under the two alternatives are illustrated by
taking the data used for the consignee; assume that the cost of TV sets
shipped to Awasa is 2,500 each.

Upon shipment
The entry to be made under both alternatives would be:
Consignment Out-Ahmed Kedir 25,000

Inventories 25,000
Packing expenses of 300 allocated to consigned merchandise
Alternative i)
Consignment Out-Ahmed Kedir 300
Packing Expense 300

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Alternative ii)
No entry required.
Consignment sales of 35,000 reported by consignee
Alternative i)
Cash 31,000
Consignment Out- Ahmed Kedir 500
Commission Expense- Cons Sales 3,500
Consignment Sales 35,000

Cost of Goods Sold 25,800

Consignment Out- Ahmed Kedir 25,800

Consignment sales 35,000

Less: Cost of Cons Sales 25,800
Commission 3,500 29,300
Gross profit on consignment sales 5,700

Alternative ii)
Cash 31,000
Freight Out Expense 500
Commission Expense 3,500
Sales 35,000

Cost of Goods Sold 25,000

Consignment Out- Ahmed Kedir 25,000
Included in total sales 35,000
Included in cost of all merchandise sold 25,000
Included in total packing expense 300
Included in total freight out expense 500
Included in total commission expense 3,500

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Accounting for Partial Sale of Consigned Merchandise
Continuing the previous illustration, let us assume that four of the ten
TV sets on consignment are sold at the end of the accounting period. To
prepare financial statements, the consignor must determine the amount
of gross profit realized on the sold units and the inventory value of the
unsold units.
Journal entries under the two alternatives:
Consignment sales of 14,000 reported by consignee and payment of
5,000 received. Charges by consignee: freight costs of 500 and
commission of 1,400
Alternative i)
Cash 5,000
Trade Accounts Receivable 7,100
Consignment Out- Ahmed Kedir 500
Commission Expense- Cons Sales 1,400
Consignment Sales 14,000

Cost of Consignment Sales 10,320

Consignment Out- Ahmed Kedir 10,320
2500+30+50=2580*4
Inventories on consignment 15,480
Alternative ii)
Cash 5,000
Trade Accounts Receivable 7,100
Freight Out Expense 500
Commission Expense 1,400
Sales 14,000

Cost of Goods Sold 10,000

Consignment Out- Ahmed Kedir 10,000

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 2500*4
Consignment Out-Ahmed Kedir 480
Packing Expenses (30*6) 180
Freight Out Exp (50*6) 300
Direct costs relating to unsold merchandise
Inventories on Consignment 15,480

Return of Unsold Merchandise by Consignee

Packing and shipping associated with consigned merchandise are
properly included in cost. However, if the consignee for any reason
returns the merchandise to the consignor, the packing and shipping
costs should be recognized as an expense of the current accounting
period. The place utility originally created by these costs is lost when the
merchandise is returned. Any return shipment and repair costs should
also be recognized as expense.
Advances from Consignees
Although cash advances from a consignee are sometimes credited to the
consignment out account, a better practice is to credit a liability account,
Advance from Consignees. The consignment out account then will
continue to show the carrying amount of merchandise on consignment.
Assignments
Review questions
Exercises
20-1, 20-4, 20-6, 20-7, 20-9, 20-12, 20-13, 20-14.

Cases 20-1 & 20-2

Problems 20-1 & 20-6

Chapter 12 of the text

Review questions 7-10
Exercises
12-1 (1-7), 12-2, 12-5, 12-7

Chapter 13 of the text

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Review questions
Exercises 13-7, 13-8

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