10.2 CONCEPTS OF CONSIGNMENT
You know that goods are often sent by the producer on consignment basis to the selling agents or distributors. Let us now understand what exactly we mean by consignment, how it differs from sale and what kind of relationship exists between the consignor and the consignee.
10.2.1
What is consignment?
When goods are sent by a manufacturer or a trader to an
agent to be sold by him on commission basis and at the risk and account of the
former, they are said to be sent on. Consignment. In other words a producer trader
forwards his products to his selling agents, appointed at different places, to
sell them on his behalf for an agreed commission. The process of sending goods
on this basis by one firm to another for sale is known as consignment and this
transaction is called a 'Consignment Transaction'. The consignment ' is
'Outward Consignment' for the person who sends the goods and an 'Inward
Consignment' for the person who receives the goods for sale.
10.2.2
Parties to consignment
You know that in consignment the goods are sent by one
person to another for sales by the latter on behalf of the fomier. Therefore.
There are two parties involved: (1) the person who sends the goods and, (ii)
the person to whon the goods are sent. The person who sends the goods to the agent
is called the consignor and the person to whom the goods are sent for sales is
called the consignee.
If 'X' sends goods to 'Y' for sale, 'X' is known as
consignor and 'Y' consignee. The Consignor is the 'principal' and the consignee
is the 'agent'. Their mutual relations are governed by the Law of Agency and,
of course, hy the terms of the contract between themselves. The consignee is a
special kind of agent who is in possession of the goods. He passes the title of
the goods to those who buy from him even if he sells the goods in Contravention
to the principal's instructions. Suppose, the consignor instructs the consignee
not to sell the goods below a certain price. If the consignee sells the goods
below the stipulated price, the buyer will have good title to the goods. 'The
consignor may, of course, ask the consignee to pay damages for breaking the
terms or the contract with him. Like all agents, the consignee must render true
accounts to the consignor, be faithful to him, and act according to his instructions.
He is entitled to remuneration and reimbursement of expenses incurred by him on
behalf of the consignor.
10.2.3
Features of Consignment
- Goods are forwarded by the consignor to the consignee with an objective of sale at a profit
- Under the consignment. Goods are to be treated as the property of the consignor and to be sold at his risk entirely. The consignee does no1 buy the goods, he merely undervalues lo sell them on behalf of the consignor. He is not responsible for any loss or even for any destructions or damages to the goods. But the consignee should not show any negligence.
- The consignor does not sell the good? To the consignee. Therefore, he cannot ask the consignee to pay the price of the goods unless they are sold and the sale proceeds are actually realized
- The consignee agrees to sell the goods for an agreed rate of commission and 1s allowed to deduct his commission due from the sale proceeds.
- The agent enters into the picture only when he sells the goods and realizes the amount. 1 He becomes indebted for amounts realized on behalf of the principal. The relationship! Between the consignor and the consignee is that of a principal and an agent.
- As it is not a sale, whatever the consignee does is on behalf of the consignor and, 1 therefore, all legitimate expenses incurred by the consignee for receiving and selling [he goods should be reimbursed.
- Any stock remaining unsold with the consignee belongs to the consignor.
- As the consignee acts on behalf of the consignor, the profit or loss on sale of goods sent on consignment belongs to the consignor.
10.2.4
Distinction between Sale and Consignment
Although the possession of goods is transferred from one
person to the other both in case of sale and in case of consignment, they
differ from each other in various ways. The difference. Between an outright
sale and the goods sent on consignment has been explained as follows:
|
No. and Itern |
Sale |
Consignment |
|
1 Parties 2 Ownership and title of goods 3 Relationship 4 Expenses 5 Risk 6 Return of Goods 7 Account Sales 8 Unsold Goods |
Seller and Buyer Ownership and title of goods is transferred to the buyer of the
goods. The relationship he tween the seller and the buyer of the goods is
that of a creditor and debtor. Risk attached to the goods sold is transferred to the buyer of goods
as soon as goods are sold. In case, the goods are destroyed after sale, the
loss is suffered by the buyer. Return of goods is not possible as goods once sold are not returnable No Account sale is required to be submitted hy the buyer to the
seller. |
Consignor and Consignee The legal ownership and title of 'goods is not transferred to the
consignee. It remains with the consignor till they are sold. The relationship between the consignor and the consignee is that .of
a principal and an agent. The. Consignee is to sell goolrs on behalf of the
consignor. Expenses incurred by the consignee in connection with the goods
consigned to him are bome by the consignor. Risk attached to the goods consigned lies with the consignor tilt the
goods consigned ore sold. In case the goods are destroyed the lass is borne
by the consignor. Goods Can be returned if they are not sold by the consignee Account side has to be submitted by the consignee to the consignor from time to time. Unsold goods with the consignee will be treated as stock of the consignor. |
|
The distinction between sale and consignment given
above also amply clarifies the difference between the rights and duties of
the buyer and the consignee |
||
Question Pepper-( Click Hear)
10.2.5
Important Terms in Consignment
There are a few terms relating to consignment which are
commonly used. These are preform invoice, account sales, non-recurring and
recurring expenses, and commission advance, etc. These are explained as
follows:
Proforma Invoice: Since the goods sent on consignment
cannot be treated as sales, the consignor does not prepare proper invoice. He
simply prepares a Proforma Invoice and sends it to the consignee, along with
the goods dispatched. This is prepared with a view to. Inform the consignee
about price of goods, expenses incurred, mode of transportation and the minimum
sale price at which the goods are to be sold. A specimen of proforma invoice is
given in figure 10.1
Note: 'E.Br.0.E. Stands for Errors and Omissions Excepted.
Which mean that invoice is subject to the errors of omission and commission.
In the above invoice Babbar Traders are the consignors and
Hari Kishan Enterprises the consignee. Goods worth Rs. 3.00.000 have been
consigned on which a sum d' Rs. 13,000 has been incurred on various expenses.
Account Sales: As the consignee is an agent and is selling
the goods on behalf of the consignor, he has to furnish the details of sale
proceeds, expenses, commission, etc. to the consignor. He furnishes all these
details by means of a statement called 'Account Sales'. This shows the quantity
and description of goods sold, sale proceeds realised, the exp. nses incurred by
the consignee, commission due to him, and the balance amount payable by him to
the consignor. While preparing an Account Sales the consignee wijl deduct all
expenses incurred by him in relation to the consignment and the commission due
to him. The Remittances made in advance, if any, are also to be deducted from
the balance so obtained. The consignee will send a bank draft or his acceptance
for the balance due to the consignor. Illustration 1 will give you a clear
understanding as to how an Account Sales is prepared.
Illustration 1
On January I, 1987 Babbar Traders of Bombay consigned 500 Bush Radio sets to Hari Kishan Enterprises, Madras. The cost of each set was Rs. 750. On receiving the consignment, Hari Kishan Enterprises sent a bank draft for Rs. 25,000 as an advance to Babbar Traders. Hari Kishan Enterprise paid Rs.1500 for freight. Rs, 2,000 for control Rs. 2,500 for godown rent and other selling expenses. Hari Kishan enterprises submitted an Account Sale on March, 1, 1987 showing that all the sets had been sold at Rs. 850 each. They were entitled to 10% commission on sales. Prepare the Account Sales.
Solution
a)
Ordinary Commission: It is a commission usually
paid as a fixed percentage on gross sale proceeds. The terms commission
normally denotes ordinary commission, unless specified otherwise. The consignee
is not responsible for any bad debts and he does not guarantee the payment from
all those who buy on credit so long as he is getting ordinary commission only.
b) Special
Commission: This is the commission which the consignee gets over and above '
the ordinary commission. It can be sub-divided into two categories viz., (i)
Over-riding Commission and (ii) Del Credre Commission.
i.
,Over-riding Commission :This is an extra
commission allowed over and above the normal commission and is generally
offered when the agent is required to put in hard work either in introducing a
new product in the market or where he is entrusted. With the work of
supervising the performance of other agents in a particular area. This
commission is also given for sales at prices higher than the price fixed by the
consignor.
ii.
Del Credre Commission: Usually, all the losses
are borne by the consignor. Sometimes the consignor expect, that the consignee
should also be responsible for recovering the debts and bear the loss on
account of bad debts, ‘if any. In order to compensate him for this
responsibility he is given some extra commission called Del Credre Commission'.
Such commission is calculated on the total sales unless there is a special
agreement to the effect that it is to be paid only on the amount of credit
sales. Payment of this commission imposes extra liability on the consignee and
induces him to deal in a prudent and cautious manner.
In Illustration 2 we have given you the details regarding,
the computation of commission. It a would certainly give you an idea about the
calculation of normal commission and special. Commission.
Illustration 2
Rajadhani Cycles Ltd, sent 2,000 dynamos costing Ks. 50 each
for sale on consignment basis to Banerjee & Co. Calcutta. Normal selling
price per dynamo is Rs. 60. Consignee is entitled to commissions at i) 5% on normal
selling price; ii) 10% additional commission on excess sales and iii) 1 ½ % Del
credre commission on total sales for guaranteeing collection of credit sales
Banerjee & Co. reported sales of 500 dynamos at Rs. 60 each and dynamos at
Rs. 75 each on cash basis and 400 dynamos at Rs. 75 each and another 400 at Rs.
80 each on credit basis, Compute consignee's commission.
Solution
(i) Non-recurring Expenses. And (ii) Recurring Expenses.
i) NOH-recurring Expenses:
All tlie expenses which art: incurred for bringing goads to tire gudawn of the
consignee are Non-recurring in nature. Such expenses are generally incurred on
the consignment as a whole, the non-recurring expenses will be incurred partly
by the consignor and partly by tlie consignee.
The consignor usually incurs expenses on sending the goods: to
the consignee such as packing cartage lodging charges, insurance, freight, ctc.
The consignee usually incurs expenses on receiving the goods from the consignee
such as dock dues, customs duty, clearing charges, octrees, etc.
ii) Recurring Expense: These expenses are incurred
after the goods have reached the consignee's place or godown. They are
recurring in nature because they may be incurred repeatedly by the consignor
and the consignee. The examples of recurring expenses incurred, by the
consignor are: advertising, discount on hills, commission on collection of
cheques, travelling, and expenses of salesmen. bad debts etc. The examples of
recurring expenses incurred by the consignee are godown rent: godown insurance,
sales promotion, etc.
Advance: It is a common trade practice for the
consignee to demand some advance from the consignee as a security for the goods
dispatched lo him. It may be in the form of cash or bank draft or in the form
of a bill of exchange. The consignee will send some amount as an advance before
or after he receives the goods from the consignor. The advance received from
the consignee should not be credited to consignee account as it is not a part
of the sale proceeds. The advance will be adjusted against the amount due from
the consignee when the accounts are finally settled. In some cases, a bill may
be drawn on the consignee if he is not in a position to pay advance money. The
consignor can discount the bill with his bankers. In such a case the value of
the hill (as advance) so accepted will be deducted from, (he sale proceeds. The
discount paid to the bank can be straight away charged to the Profit & Loss
Account as it represent cost of raising finance.
Check
Your Progress B
1 Distinguish between Account Sales and Sales Account?
……………………………………………………………………………………………………………………………………………………..
2 Under what circumstances can the consignee get a special
commission'?
……………………………………………………………………………………………………………………………………………………
3 Fill in the blanks:
i) E. & O.E. stands for............
ii) Consignor allows............. Commission to the
consignee to bear the bad debts.
iii) ............. Expenses are those expenses which
arc incurred after the goods reach the consignee's godown.
iv) The consignee gives advance to the consignor as
a ............... for goods despatched.
v) Unloading charges paid by the consignee are ................ expenses.
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