10.3 ACCOUNTING TREATMENT
The transactions relating to each
consignment are recorded in such a way that the profit or loss of each
consignment can be worked out separately. For this purpose the consignor
prepares a Consignment Account relating to each Consignment to which all
concerned expenses including the cost of goods consigned ale debited and the
sales proceeds and the closing stock are credited. In addition, he also
maintain a consignee’s account in order to compute the amount due from him. The
consignee, on the other hand, simply maintains consignor's account in his books
to which he debits the amounts remitted to the consignor the expenses incurred
by him in relation to the consignment and the commission due to him. . Consignor's
Account is credited mainly by the amount sale proceeds. Now let us study ' how
various transactions related to Consignment are recorded in the books of the
consignor and the consignee.
10.3.1
Books of the Consignor
You know each transaction is
recorded first in subsidiary Book and then posted to the respective accounts in
the ledger. All transaction related to consignment therefore, are first
recorded in the Journal. The entries passed in respect of various transition
are as follows:
Goods dispatched to the consignee: As you know the
consignment of goods cannot be
treated as a sale of goods. Therefore, Sales Account will not be credited. In
its place. An account called ‘Goods sent consignment Account will tic credited
and the Consignment Account is debited with the cost of the goods consigned.
Thus the journal entry will be as follows:
Consignment A/c Dr.
To Goods Sent on Consignment A/c
(Being the value of the consignment)
If consignments have been sent to more than one consignee, the
consignment accounts may be distinguished by adding the names of the places to
the Consignment Account. (For example Consignment to Calcutta Account,
Consignment to Gonda Account, etc.)
Expenses incurred by the consignor: All expenses incurred by the consignor on consignment of goods are debited to the Consignment Account and are thus added to cost of goods consigned. The entry would be:
Consignment A/c Dr.
To Cash I Bank A/c
(Being the expenses incurred on the consignment)
Advance made by the consignee: The amount of advance received from the consignee cannot be treated as sale proceeds, and so should not be credited to the Consignment Account. It is treated as follows.
Cash/Bank/Bills Receivable A/c Dr.
To Consignee’s A/c
(Being an advance from the consignee)
Bill received from the consignee discounted with the bank: If the consignor gets the bills receivable discounted from his bankers, the entry will be :
Bank A/c Dr. Discount A/c Dr.
To Bills Receivable A/c
(Being bill discounted with the bank)
Receipt of account sales from the consignee: When the goods
are sold out, the consignee will send an Account Sales to the consignor
intimating him the total sales and the amount of his expenses and commission.
The following three entries will be recorded in this connection
a) For
sales made by the consignee :
Consignee's A/c Dr.
To Consignment A/c
(Being gross proceeds of sales)
b) For
consignee's expense :
Consignment A/c Dr.
To Consignee's A/c
(Being expenses incurred by the consignee in dealing with consignment)
C) For consignee's
compassion:
Consignment A/c Dr.
To Consignee's A/c
(Being commission payable on sale proceeds)
Goods returned by the consignee: Sometimes defective or obsolete goods are returned by the consignee to the consignor. When such goods are received, the journal entry will be :
Goods Sent an
Consignment A/c Dr.
To Consignment A/c
(Being goods
returned by the consignee)
Bad debts incurred: When
the consignee is entitled to del credre commission no entry for bad debts is to
be passed as such loss is to be borne by the consignee himself. When Del credre
commission is riot paid, the loss on account of bad debts is to be by the
consignor, the entry kill be:
Consignment A/c Dr.
To Consignee's A/c
(Being value of bad
debts)
Remittance by the consignee in full settlement: The balance amount will have to be remitted by the consignee to the consignor on settlement of the account. The following entry will be recorded, when the consignee remits to the consignor:
Cash/Bank/Bills
Receivable A/c Dr.
To Consignee's A/c
(Being balance due from the consignee received).
Profit or loss on consignment:
When you balance the Consignment Account, it reveals profit or loss. If the
total of credit side is more than the total of debit side it is a profit and if
the total of debit side is more than that of the credit side, it is a loss. The
profit or loss is transferred to the Profit & Loss Account and thus the
Consignment Account is closed.
The following entries will be recorded:
a)
If there is a profit:
Consignment A/c
Dr.
To Profit & Loss A/c
(Being profit on consignment)
b)
b) If there is loss:
Profit & Loss A/c Dr.
To Consignment A/c
(Being loss on consignment)
Closing
entry for goods sent on consignment: Goods sent on Consignment
Account is closed by transfer to the Trading Account. The entry passed is as
follows:
Goods Sent on Consignment A/c Dr.
To Trading A/c
(Being goods sent on consignment account closed)
Unsold stock with the consignee: It is quite possible that all the goods sent on consignment are not sold by the consignee up to the date on which final accounts are prepared.' Some goods may remain unsold known as the consignment stock. This. I should be properly valued and credited to the Consignment Account. You will learn about the valuation of unsold stock in unit 11. However, the entry for consignment stock will be
Consignment Stock A/c Dr.
To Consignment A/c
(Being unsold goods with the consignee)
You have learnt how to record consignment transactions in the Journal of the consignor. Now let us see how various accounts effected are shown in the ledger and how profit or loss on consignment is worked out. The consignor usually maintains the following three accounts:
Consignment Account: It is prepared by the consignor showing all transactions relating, to a particular consignment. The objective of this account is to-ascertain net profitless arising from each consignment. Once goods are consigned by the consignor, its cost is debited to the Consignment Account along with various expenses incurred by the consignor bad the consignee in dealing with that particular consignment. The commission due to the, 'I consignee is also debited to the Consignment Account. When Del Credre commission: is not paid, the bad debts, if any, are also to be debited to this account. Once the goods reach the consignee some of these will be unsold and the rest sold either on cash or on credit, Irrespective of the type of sale, the entire sale proceeds will be shown on the credit side of the Consignment Account. The unsold goods are heated as consignmen1 stock and credited to this Account. If same goods are found unsuitable for sale, the consignee will send them back to the consignor and the same will appear on the it’s credit side. After all these items are recorded, the Consignment Account is balanced. The difference between the debit and credit totals of Consignment Account is regarded as profit or loss which is transferred to the Profit and Loss Account and the Consignment Account stands closed. It is infect a nominal account and is just like Trading and Profit and Loss Account about which you have studied earlier in final accounts. Therefore, the principles applied to Trading and Profit & Loss Account hold good for this account also. Like Trading and Profit & Loss Account all expenses and purchases are debited to this account and all sales and incomes are credited. The preform of the consignment account is given in Figure 10.2.
Goods Sent on Consignment Account: This is a real account.
It deals with the goods transferred from the consignor to the consignee and
goods returned by the consignee to the consignor. All the goods consigned by
the consignor will be credited lo this account and the goods retuned by the
consignee are debited to this account. The balance represent? The cost of goods
with consignee for sale, and is transferred to the Trading Account. The
proforma of the Goods Sent on Consignment Account is depicted in Figure 10.3
Look at Illustration 3 and see how various transactions
relating to consignment are recorded in the books of the consignor
Illustration 3
Bush Radio 4 Co,, Delhi sent on consignment to Chadda &
Co., Calcutta 100 radio sets, invoiced at Rs. 100 each on January 6, 1986. Bush
Radio & Co. paid Rs. 1,000 on the same day for dispatching goods to the
consignee. Consignee remitted Rs. 5,000 as an advance by bank draft on January
14. The consignee is entitled to a commission of 108 on the sale proceeds. On
receipt of goods the consignee paid Rs. 1,000 for freight and Rs. 500 for
godown charges. On January 28, Chadda & Co. sent an Account Sales showing
that the radio sets have realized Rs. 200 each. He remits the amount due to
Bush Radio & Co. Pass Journal entries and prepare ledger accounts in the
books of the consignor.
10.3.2 Books of the Consignee
The Consignee mainly prepares a
consignor's account in his books to find out what is finally due to the
consignor. He records all transactions relating to the consignment first in the
Journal and then posts them tb-the relevant accounts (including Consignor's
Account) in the ledger. The journal entries passed by the consignee are:
1 Receipt of goods from the
consignor: No entry is passed by the consignee when he receives
goods from the consignor because receipt of goods on consignment. Does not
amount to purchases of goods by him. He keeps them in his godown on behalf of
the ' consignor for which he usually maintains an Inwards Consignment Book.
2 Expenses incurred by the
consignor: No entry is passed by the consignee.
3 Advance made by the consignee
Consignor's A/c Dr.
To Bank Bills Payable A/c
(Being advance made by the consignee)
4 Bill discounted by the consignor with the bank:
No entry is passed by consignee.
5 Sale of goods by the consignee.
Cash A/c (cash sales) Dr.
Consignment Debtors A/c Dr.
(Credit sales)
To Consignor's A/c
(Being goods sold)
6 Expenses incurred by the consignee: Being an
agent of the consignor, all legitimate expenses incurred by the consignee
related to the consignment are to be reimbursed by the consignor, the entry
will be:
Consignor's A/c Dr.
To
Cash/Bank A/c
(Being expenses incurred on consignment)
7 Commission due to the consignee: This should
include all types of commissions due to the consignee: The entry will be
Consignor's A/c Dr.
To Commission A/c
(Being commission due on sales)
8 Return of goods to the consignor: No entry will be passed in the books of the consignee as no entry was passed at the time of receipt of the goods.
9 Payment received from debtors
Cash/Bank A/c Dr.
To Consignment Debtors A/c
(Being amount collected from debtors)
10 Bad debts incurred
a) .If consignee does not get del credre commission all bad debts
have to be borne by the consignor himself. The entry will be.
Consignor's A/c Dr.
To Consignment Debtors A/c
(Being bad debts on consignment)
b) If del credre commission is paid to the consignee, the bad debts
are to be borne by Him. The entry will be:
Bad Debts A/c Dr.
To Consignment Debtors A/c
(Being bad debts incurred on consignment)
11 When the bills payable accepted in favor of consignor is
met on the due date:
Bills Payable A/c Dr.
To Bank A/c
(Being bills payable honored)
12 Remittance In final settlement
Consignor's A/c Dr.
To Cash/Bank Account
To Bills Receivable Account
(Being payment of the balance due to the consignor)
13 Unsold stock in possession of the consignee: No entry will be passed for unsold goods in the books of the consignee as no entry is passed when he received goods from the consignor.
14 Profit or Loss on consignment: No entry is passed for profit or loss on consignment as the consignee is not concerned with it.
The Consignee also prepares ledger accounts after passing all the journal entries. The Consignor's Account and Commission Account are the two important accounts prepared by - The consignee in his books. Of course, he will also do the postings to the other accounts such as Consignment Debtor's Account, Consignment Expenses Account and Bills payable. Account, etc. but these are of less importance, hence not discussed here.
Consignor's Personal Account: This is the main account in Consignee's ledger which is prepared for working out the amount due to the consignor. Whatever amount he receives from sales of goods is credited to this account. All expenses incurred by the consignee in relation to consignment, the concision due to him, and the advance given by him to the consignor will be debited to this account. Further, if the consignee does not. get del credre commission, the bad debts on account of credit sales are also debited to the Consignor's Account. The balance of this account indicates the amount payable to the consignor. This account is just the opposite of the Consignee's Account in the books of the consignor. The profonna of the Consignor's Account is given in Figure 10.5
2- Commission Account: This is
nominal account. It shows the income earned by the consignee for the services
rendered by him. All types of commission whether, ordinary or special, due to
the consignee is credited to this account. The Commission Account will be
debited with had debts if the consignee is to bear such loss because of del
credre commission. The profoma of the commission Account is given in Figure
10.6
Taking the data of illustration 3 Iet us see how transaction related to consignment will be recorded in the books of the consignee,
Check
Your Progress C
1 Fill in the blanks.
i) All
expenses incurred by the consignee are.............. to Consignment Account.
ii) When the
defective goods are returned by the consignee, the consignor debits it to
.........,. Account.
iii) When
there is no del credre commission, bad debts ate borne by the...........
iv)
Consignment Account is similar to.......... Account.
V) Consignee
passes........ Entry for closing stock.
vi)
Commission Account is a .....,..... Account.
2 Explain why the consignee does not pass any entry for
a) Goods
sent on Consignment
b) Profit or
loss on consignment, and
C) Closing stock.
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