Year: 2020

Management Notes

Distinction between Joint Venture and Consignment

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Key differences between Joint Venture and Consignment

Basis of Comparison Joint Venture Consignment
Definition Temporary business partnership Goods sent to agent for sale
Parties Involved Co-venturers Consignor and Consignee
Ownership Joint ownership by partners Ownership remains with consignor
Objective Profit sharing Selling goods on behalf
Agreement Formal or informal Formal agreement
Risk Sharing Shared by all partners Borne by consignor
Profit Sharing Shared as per agreement Commission for consignee
Scope Broad (business activity) Narrow (selling specific goods)
Investment Contributed by partners Provided by consignor
Control Joint control by partners Control by consignor
Duration Temporary (until completion) Ongoing as per agreement
Accounting Separate joint venture account Consignment account maintained
Legal Entity Not a separate legal entity Not a separate legal entity
Risk of Loss Shared by co-venturers Borne by consignor
Termination On completion of venture As per agreement

Joint Venture

Joint Venture is a business arrangement where two or more parties come together to undertake a specific project or business activity, sharing resources, risks, and profits. Unlike a partnership, a joint venture is usually formed for a temporary period or a single project, after which it may dissolve. Each party maintains its distinct identity while contributing assets, capital, and expertise to achieve mutual goals. Joint ventures are common in large-scale projects like infrastructure, technology development, and international business expansion, where collaboration enhances competitive advantage and market reach.

Consignment

Consignment is a business arrangement where a consignor (owner) sends goods to a consignee (agent) to be sold on their behalf. The consignor retains ownership of the goods until they are sold, while the consignee earns a commission for facilitating the sale. The consignee is responsible for marketing and selling the goods but does not bear the financial risk of unsold inventory. Once the goods are sold, the consignee remits the proceeds to the consignor, keeping a portion as agreed. This arrangement is common in retail and distribution businesses.

Management Notes

Key differences between Joint Venture and Partnership

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Joint Venture

Joint Venture (JV) is a business arrangement where two or more parties collaborate to achieve a specific objective or project while maintaining their separate legal identities. It combines resources, expertise, and efforts of the parties involved, ensuring shared risks and rewards. Typically formed for a defined purpose and duration, a JV operates as an independent entity, leveraging the strengths of each partner. In India, joint ventures are popular for entering new markets, sharing technology, or undertaking large-scale projects, offering flexibility and mutual benefits to all participants.

Features of Joint Venture:

  • Partnership for a Specific Purpose

Joint venture is formed to accomplish a specific objective, such as developing a new product, entering a new market, or sharing technological expertise. Once the purpose is fulfilled, the joint venture may dissolve, making it different from a general partnership.

  • Separate Legal Entity

Depending on the structure chosen, a joint venture can operate as a separate legal entity distinct from the participating parties. This ensures the venture has its own assets, liabilities, and operational control, insulating the parent companies from direct risks.

  • Shared Ownership and Management

The parties involved in a joint venture share ownership based on their contributions, such as capital, expertise, or technology. Decision-making is typically collaborative, with all partners having representation in management according to the agreed-upon terms.

  • Shared Risks and Rewards

One of the defining features of a joint venture is the sharing of risks and rewards. Each party assumes a portion of the financial and operational risks while also benefiting proportionally from the profits or strategic advantages.

  • Defined Duration

Joint venture is usually established for a limited period or for the duration of the specific project. However, some joint ventures can evolve into long-term collaborations if both parties find the arrangement beneficial.

  • Contributions by Partners

Each party contributes specific resources to the joint venture, which can include capital, technology, intellectual property, manpower, or market access. These contributions are clearly outlined in the joint venture agreement to avoid disputes.

  • Legal and Contractual Agreement

Joint venture is governed by a legal agreement that details the terms and conditions, including profit-sharing ratios, roles and responsibilities, and dispute resolution mechanisms. This agreement ensures clarity and minimizes conflicts between partners.

  • Limited Scope of Activities

Joint venture’s scope is limited to the specific project or objective for which it is formed. The venture does not engage in unrelated business activities unless expressly agreed upon by the partners.

Partnership firm

Partnership firm is a business structure where two or more individuals come together to operate a business with a mutual goal of earning profits. Governed by the Indian Partnership Act, 1932, partners share responsibilities, profits, and liabilities according to their agreement. The firm is not a separate legal entity; it operates under the names of its partners, who are jointly and severally liable for its debts. Partnerships are easy to form, require minimal formalities, and offer flexibility in management, making it an attractive option for small and medium businesses.

Features of a Partnership Firm

  • Two or More Partners

Partnership firm is formed by the agreement of at least two individuals. The maximum number of partners allowed in a partnership firm is 50, as per the Indian Partnership Act, 1932. Partners contribute capital, share responsibilities, and jointly manage the business.

  • Mutual Agency

Each partner in a partnership firm acts as an agent for the firm and for the other partners. This means that any act performed by a partner within the scope of the partnership agreement binds all partners, making them liable for the firm’s obligations.

  • Profit Sharing

Partners of a firm share profits (or losses) according to the terms laid out in the partnership agreement. In the absence of a written agreement, profits are shared equally. The agreement may also specify the ratio in which profits and losses are distributed among the partners.

  • Unlimited Liability

Partners in a partnership firm have unlimited liability. This means that if the business incurs debts or liabilities beyond its assets, the personal assets of the partners can be used to cover these debts. Each partner is liable jointly and severally for the firm’s obligations.

  • No Separate Legal Entity

Partnership firm is not considered a separate legal entity from its partners. It does not have its own legal status and cannot own property in its name. The partnership exists only through its partners and is governed by the partnership agreement.

  • Voluntary Association

Partnership is a voluntary association of individuals. The partners willingly enter into the partnership, and they can dissolve or modify the partnership at any time as per mutual consent. No external authority can impose a partnership on the individuals involved.

  • Easy Formation and Flexibility

One of the key advantages of a partnership firm is its simple formation process. It requires minimal legal formalities, mainly the drafting of a partnership deed that outlines the terms and conditions of the business. This flexibility also extends to the management of the firm, where partners have the freedom to decide their roles.

  • Limited Continuity

Partnership firm does not have perpetual succession. Its existence is tied to the continuity of its partners. The firm can be dissolved upon the death, insolvency, or withdrawal of any partner, unless the remaining partners agree to continue or form a new partnership.

Key differences between Joint Venture and Partnership

Basis of Comparison Joint Venture Partnership
Formation Specific agreement Partnership deed
Purpose Specific objective Continuous business
Legal Entity Temporary entity Ongoing legal entity
Ownership Shared contributions Equal/variable shares
Profit Sharing Agreed ratio As per deed
Scope of Business Limited Broad
Registration Optional Usually required
Tax Liability Specific project-based Continuous liability
Duration Temporary Perpetual
Management Collaborative Partner-driven
Dispute Resolution Agreement-based Legal provisions
Accounting Separate records Single set of books
Risk Sharing Specific to project Shared across business
Dissolution Upon project completion Legal process
Management Notes

Maintaining Separate books for Joint Venture

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When two or more parties engage in a joint venture, they may decide to maintain separate books of accounts to record the financial transactions of the venture. This method ensures clarity in recording transactions, sharing profits or losses, and tracking contributions made by each party. Separate books are particularly useful for larger ventures involving significant investments, multiple transactions, or a long duration.

Features of Maintaining Separate Books:

  • Joint Bank Account:

A joint bank account is opened to record all cash transactions, including contributions by co-venturers, payments for expenses, and receipts from sales or services.

  • Joint Venture Account:

This account is used to record all transactions related to the joint venture, such as expenses incurred, revenues earned, and the profit or loss from the venture.

  • Co-Venturers’ Accounts:

Separate accounts for each co-venturer are maintained to record their contributions, withdrawals, and share of profit or loss.

Steps in Maintaining Separate Books:

  • Opening a Joint Bank Account:

Each co-venturer contributes their share of initial capital, which is deposited in the joint bank account. The account is then used for all cash transactions during the venture.

  • Recording Expenses:

All expenses related to the venture, such as purchase of goods, wages, and other overheads, are paid through the joint bank account and recorded in the joint venture account.

  • Recording Revenues:

Any income or revenue earned from the joint venture operations is deposited into the joint bank account and recorded in the joint venture account.

  • Distribution of Profit or Loss:

After determining the profit or loss of the joint venture, it is transferred to the co-venturers’ accounts in their agreed ratio.

  • Settlement:

Upon completion of the joint venture, the remaining cash balance in the joint bank account is distributed to the co-venturers after settling any outstanding liabilities.

Example

A and B enter into a joint venture to sell imported electronic gadgets. They agree to share profits and losses equally. Below are the transactions during the venture:

  1. Initial Contribution:
    • A contributes ₹1,00,000.
    • B contributes ₹1,00,000.
  2. Expenses Incurred:
    • Goods purchased for ₹1,50,000.
    • Transportation expenses of ₹10,000.
    • Advertising expenses of ₹20,000.
  3. Revenue Earned:
    • Total sales amount to ₹2,20,000.
  4. Profit Distribution:
    • The profit is shared equally between A and B.

Journal Entries

Date Particulars Debit (₹) Credit (₹)
Jan 1 Joint Bank Account Dr. 2,00,000
To A’s Account 1,00,000
To B’s Account 1,00,000
Jan 5 Joint Venture Account Dr. 1,50,000
To Joint Bank Account 1,50,000
Jan 10 Joint Venture Account Dr. 10,000
To Joint Bank Account 10,000
Jan 15 Joint Venture Account Dr. 20,000
To Joint Bank Account 20,000
Jan 31 Joint Bank Account Dr. 2,20,000
To Joint Venture Account 2,20,000
Jan 31 Joint Venture Account Dr. (Profit) 40,000
To A’s Account 20,000
To B’s Account 20,000

Profit Calculation

Particulars Amount (₹)
Revenue from Sales 2,20,000
Less: Goods Purchased 1,50,000
Less: Transportation 10,000
Less: Advertising 20,000
Profit 40,000

Each co-venturer’s share of profit = ₹40,000 ÷ 2 = ₹20,000

Ledger Accounts

1. Joint Bank Account

Date Particulars Debit (₹) Credit (₹) Balance (₹)
Jan 1 A’s Contribution 1,00,000 1,00,000
B’s Contribution 1,00,000 2,00,000
Jan 5 Goods Purchased 1,50,000 50,000
Jan 10 Transportation 10,000 40,000
Jan 15 Advertising 20,000 20,000
Jan 31 Sales Revenue 2,20,000 2,40,000
Jan 31 A’s Withdrawal 1,20,000 1,20,000
B’s Withdrawal 1,20,000 0

2. Joint Venture Account

Date Particulars Debit (₹) Credit (₹) Balance (₹)
Jan 5 Goods Purchased 1,50,000 1,50,000
Jan 10 Transportation 10,000 1,60,000
Jan 15 Advertising 20,000 1,80,000
Jan 31 Sales Revenue 2,20,000 40,000 (Profit)
Management Notes

Maintenance of accounts in the Books of Co-venturers

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When one of the Venturers keeps Accounts

If one of the co-venturers is appointed to manage the joint venture, he is awarded an extra commission or remuneration out of the profit for his services.

Journal Entries

When share of investment received from other co-venturers Cash/Bank A/cDr

To Co-venturers A/c
When goods are purchased Joint Venture A/cDr

To Cash A/c (in case of cash purchase)

Or

To Creditors A/c (for credit purchase)
When expenses incurred Joint Venture A/cDr

To Cash A/c
When goods are sold Cash A/cDr

Or

Debtors A/cDr

To Joint Venture A/c
When commission allowed to working co-venturer Joint Venture A/cDr

To Commission A/c
In case of Profit balance of joint venture, account will be transferred to profit & Loss (own share of working co-venturer) and other co-venture’s personal accounts Joint Venture A/cDr

To Profit & Loss A/c

To Co-venturers personal A/c
In case of Loss Profit & Loss A/cDr

To Joint Venture A/c
On settlement of accounts All Co-venturer A/cDr

To Cash/Bank A/c

When Separate Books of Accounts are kept for the Joint Venture

Under this method, all co-venturers contribute their share of investment and deposit their shares in a Joint Bank account newly opened for the specific purpose of the Joint Venture. They may use this bank account to make any kind of payments and to deposit sale proceeds or any other kind of receipts.

In addition to Bank account, a Joint venture account is also opened in the books to keep records of all transactions routed through this account.

This category of accounts is a personal account of the each co-venturer. Thus following three accounts are opened:

  • Joint Bank Account
  • Joint Venture Account
  • Personal account of co-venturers

When Separate Books of Accounts are not kept for the Joint Venture

It is of two types:

  • When all venturers keep separate accounts
  • Memorandum joint venture method

When all Venturers keep Separate Accounts:

  • Separate Joint venture account and personal accounts of other co-venturers are opened under this method of accounting.
  • Joint venture account is debited and bank account or creditor account is credited on the account of goods purchased or expensed.
  • Joint venture account is credited and a bank account or debtor account is debited in case of either cash sale or credit sale.
  • Each co-venturer debits joint venture account and credits personal accounts of other co-venturer on the account of either goods purchased or expensed by other co-venturers.
  • Joint venture account is credited and personal account of others co-venturer account is debited in case of sale made by other co-venturers.
  • Joint venture account is debited and commission account is credited if, commission is receivable, but if commission is receivable by other co-venturer, then the concerned co-venturer account will be credited instead of the commission account.
  • If unsold stock is taken, then goods account will be debited by crediting Joint venture account. On the other hand, if unsold stock is taken by any other co-venturer, then personal account of the co-venturer will be debited.
  • Balance in the joint venture accounts represents profit or loss and later that amount of profit or loss will be transferred to the personal accounts of co-venturers.

Note: Above transactions are possible only when all the co-venturers exchange information’s on regular basis.

Management Notes

Preparation of Memorandum Joint Venture

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When there are no separate books of accounts for the joint venture, in this case, each Co-venturer can maintain the records in the following two ways:

  1. Keep records of all the transactions
  2. Keep records of own transactions only

When the co-venturers choose to keep the record of their own transactions only, then we prepare the Memorandum Joint Venture A/c. In this case, each co-venturer records only his own transactions.

However, we cannot ascertain the profit or loss from the venture from this account. For determining the profit or loss of the Joint Venture, they prepare ‘Memorandum Joint Venture A/c’.

Each co-venturer sends a periodic statement of his transactions relating to the joint venture to the other co-venturers.

This statement helps in the preparation of the Memorandum Joint Venture A/c. As this account is not a part of the double entry system, we call it memorandum A/c.

Journal Entries

Date Particulars Amount (Dr.) Amount (Cr.)
1. Receipt of any amount or bill from other co-venturer Cash/ Bank/ Bills receivable A/c Dr. XXX
     To Joint Venture with Co-venturer’s A/c XXX
(Being receipt of money or bill from the other co-venturer)
2. On discounting of B/R Bank A/c (amount received) Dr. XXX
Joint Venture with Co-venturer’s A/c (discount) Dr. XXX
     To Bill Receivable A/c XXX
(Being bill discounted with the bank)
3. Purchase of goods for venture Joint Venture with Co-venturer’s A/c Dr. XXX
     To Cash/ Bank A/c XXX
     To Supplier’s A/c XXX
(Being cash or credit purchase of goods for Joint Venture)
4. On payment to supplier Supplier’s A/c Dr. XXX
     To Bank A/c (amount paid) XXX
     To Joint Venture with Co-venturer’s A/c (discount received) XXX
(Being payment to the supplier)
5. Supply of goods out of business Joint Venture with Co-venturer’s A/c Dr. XXX
     To Purchases/ Goods sent to Joint venture A/c (when at cost) XXX
     To Sales A/c (when at profit)  XXX
(Being supply of goods to Joint Venture from the business stock)
6. On payment of expenses Joint Venture with Co-venturer’s A/c Dr. XXX
     To Cash/ Bank A/c (cash expenses) XXX
     To Creditors A/c (outstanding expenses) XXX
(Being payment of expenses of the joint venture)
7. On the sale of goods Cash/ Bank A/c (cash sales) Dr.  XXX
Customer’s A/c (credit sales) Dr. XXX
     To Joint Venture with Co-venturer’s A/c XXX
(Being sale of goods)
8. Receipt from customers Cash/ Bank A/c (amount received) Dr. XXX
Joint Venture with Co-venturer’s A/c (discount allowed) Dr. XXX
     To Customer’s A/c XXX
(Being receipt of the amount from the customers)
9. On taking unsold goods Goods sent on Joint venture A/c Dr. XXX
     To Joint Venture with Co-venturer’s A/c XXX
(Being unsold goods taken)
10. Commission or salary to the co-venturer Joint Venture with Co-venturer’s A/c Dr. XXX
     To Commission/ Salary A/c XXX
(Being commission or salary payable to the co-venturer)
11. On profit from the venture Joint Venture with Co-venturer’s A/c Dr. XXX
     To Profit and Loss A/c XXX
(Being profit on joint venture)
12. On loss from venture Profit and Loss A/c Dr. XXX
     To Joint Venture with Co-venturer’s A/c XXX
(Being loss on venture)
13. For settlement of balance of Joint Venture with Co-venturer’s A/c
a. When debit balance Cash/ Bank A/c Dr. XXX
     To Joint Venture with Co-venturer’s A/c XXX
(Being settlement of Joint Venture with Co-venturer’s A/c)
b. When credit balance Joint Venture with Co-venturer’s A/c Dr. XXX
     To Cash/ Bank A/c XXX
(Being settlement of Joint Venture with Co-venturer’s A/c  

Important features of memorandum method are given as hereunder:

  • Only one personal account is opened by each co-venturer in his book named Joint Venture account with…………… (Name of other co-venturer). Same process will be followed by other co-venturer in his books of accounts.
  • Only one personal account will be opened by each co-venturer irrespective of the fact, how many other co-venturers are exists. For example, there is a joint venture of 4 person A,B,C, & D; now, A in his books will open only one personal account named as Joint venture with B,C, & D account.
  • Each party will record only those transactions in his book, which are done by him; the transactions done by other co-venturers will be ignored.
  • In addition to above said personal account, a combined account named as “memorandum joint venture account” will also be opened.
  • Memorandum account is merely a combined account of personal accounts opened by each co-venturer. Debit side of personal account will be transferred to the memorandum account and the credit side of personal account will be transferred to the credit side of memorandum account.
  • Transactions done by co-venturers among themselves including cash received or paid by one co-venturer to other will be ignored at the time of preparation of a memorandum account.
  • Balance of memorandum joint venture account will represent profit or loss of the particular business. Further, the profit or loss will be transferred to the individual co-venturer account in their profit sharing ratio.
Management Notes

Branch Accounts Introduction, Meaning, Objectives

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Branch Account is a record kept to track the transactions, income, and expenses of a branch of a business separately from the main office. These accounts help in analyzing the performance and financial position of each branch.

Branches may either operate with complete autonomy (independent branches) or under direct control of the head office (dependent branches). The accounting for these branches varies based on their nature. For dependent branches, the head office manages most of the financial activities and maintains their accounts. Independent branches, however, maintain their records independently and send periodic summaries to the head office.

Objectives of Branch Accounts:

  • Assessing Branch Performance

The most critical objective is to evaluate the financial performance of each branch. This helps the head office understand the profitability of the branches and take necessary steps to improve their efficiency.

  • Ensuring Proper Control

Branch accounts enable the head office to exercise better control over the operations of the branches. It ensures that financial transactions are carried out as per organizational policies and minimizes instances of fraud or mismanagement.

  • Facilitating Consolidation

Branch accounts simplify the consolidation of financial statements. The data from branch accounts can be integrated with the head office accounts to provide a complete view of the company’s financial status.

  • Promoting Accountability

By maintaining separate accounts, branch managers are held accountable for the financial results of their branches. It encourages them to manage their operations efficiently and responsibly.

  • Segregating Revenues and Expenses

Separate branch accounts help segregate the revenues and expenses of each branch, making it easier to analyze branch-wise profitability and financial trends.

  • Monitoring Inventory and Assets

Branch accounts provide a systematic record of inventory and other assets held at the branch. This helps in avoiding discrepancies and ensuring proper asset utilization.

  • Assisting in Decision-Making

Detailed branch accounts provide the management with valuable insights, aiding in strategic decision-making related to branch expansion, resource allocation, and cost optimization.

  • Legal and Tax Compliance

Maintaining proper branch accounts ensures compliance with local legal and tax regulations. This is particularly important for branches operating in different regions or countries with varying tax laws.

Types of Branches and Their Accounting

Branches can generally be classified into two types:

1. Dependent Branches

  • These branches operate under the direct supervision of the head office.
  • The head office manages most financial activities, including purchasing, pricing, and policy-making.
  • Branch accounts for dependent branches are maintained at the head office using the Debtors System or Stock and Debtors System.

2. Independent Branches

  • These branches have significant autonomy and maintain their financial records independently.
  • They prepare their profit and loss account and balance sheet and periodically send summaries to the head office.
  • The Final Accounts System is commonly used for accounting in independent branches.

Methods of Branch Accounting:

Several methods are used to maintain branch accounts, including:

  1. Debtors System:
    • Suitable for smaller, dependent branches.
    • The head office records all branch transactions, and only a summary is maintained.
  2. Stock and Debtors System:
    • Provides a detailed view of branch activities, including stock, expenses, and income.
    • Helps in effective inventory control.

  3. Final Accounts System:

    • Used by independent branches.
    • Branches prepare their trial balance, profit and loss account, and balance sheet.
  4. Wholesale Branch System:
    • Used for branches dealing with wholesale trading.
    • Focuses on maintaining separate records for wholesale inventory and accounts receivable.

Advantages of Branch Accounts:

  • Improved Financial Control:

Provides better control over branch operations and ensures adherence to organizational policies.

  • Performance Evaluation:

Facilitates the analysis of profitability and efficiency of individual branches.

  • Transparent Record-Keeping:

Enhances the accuracy and transparency of financial records.

  • Strategic Insights:

Assists in identifying underperforming branches and planning future expansion.

Management Notes

Branch Account in the books of Head Office

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Generally when branches are small their accounts are maintained by the head office. If the branch is big and, specially, if it carries on manufacturing operations also, it usually maintains its own books of account, extracts own trial balance and prepares its own trading and profit and loss account and balance sheet.

The head office must, however, present one consolidated balance sheet for the benefit of the shareholders and the outside world. The head office will maintain, in its books, “Branch Account” to which goods or cash sent will be debited: When cash is received from the branch, the Branch Account will be credited.

The account is maintained more or less like other personal accounts, so that any expenses incurred on behalf of the branch will also be debited to the Branch Account. The balance of this account shows how much money the branch owes to the head office or, in other words, how much money the head office has invested at the branch.

Similarly, in the branch books, there will be Head Office Account. Goods received from head office, expenses incurred by the head office on behalf of the branch, cash received from head office, etc., will be credited. Cash sent to the head office will be debited. The balance in the account shows how much money is owing to the head office. There are a few special points to note.

Accounts of fixed assets. Usually, accounts relating to fixed assets used by the branch are kept in the head office books even if the asset is originally paid for by the branch. If it is so, the entry on purchase of a fixed asset by a branch will be to debit Head Office and credit Cash.

The head office will pass the following entry on receipt of advice from branch:

Branch Machinery (or Furniture or Building A/c) …. Dr.

To Branch Account

If payment for the asset is made by the head office, no entry will be passed by the branch. The head office will debit the particular branch asset (Branch Machinery, Branch Furniture, or Branch Building, etc.) and credit Cash.

Depreciation of Fixed Assets:

There is no specialty if the accounts of branch fixed assets are maintained in the branch books. But if the accounts of such assets are maintained in head office books, the entry in respect of depreciation will be:

Branch Account ….. Dr.

To Branch Fixed Assets

The branch will be debited because the branch uses the asset.

In the branch books, the entry will be:

Depreciation Account …. Dr.

To Hard Office Account

Head Office Expenses:

The head office always does some work on behalf of the branch and it is, therefore, usual to charge the branch at the end of the year with a reasonable amount for service rendered by the head office. The entry is:

Branch Account …… Dr.

To Profit and Loss Account

It may credit the Salaries Account, since it is mostly service rendered by the staff of the head office which has to be accounted for. The student should note not to credit cash since no payment is made specifically on this account. When salaries were paid to the head office staff, cash was credited; now only a proportionate charge is being made to the branch. The entry to be passed in the books of the branch is:

Head Office Expenses Account ….. Dr.

To Head Office Account

Head Office Expenses Account is an expense and will be transferred to its Profit and Loss Account by the branch at the end of the accounting year.

Reconciliation of Transit Items:

Normally, the balance shown in Branch Account (in head office books) and in the Head Office Account (in branch books) should be the same. One will be debit and the other will be credit. But on a particular date, there may be a difference in the balances shown by the two accounts. Suppose, branch remits cash on 30th March.

The branch will immediate debit head office and credit cash. But the head office will not pass the entry for receipt of cash till cash is actually received and that may be a few days later. For a few days, therefore, the two accounts will show different balances. On the date of closing of the accounts, the items in transit have to be brought into books. Adjustment entries have to be passed by the one which originally sent the cash or goods.

If cash is sent by the branch and is still in transit on the day of closing, branch will pass the following entry to make the necessary adjustment:

Cash in Transit Account ….. Dr.

To Head Office Account

Cash in Transit is an asset and will be shown in the balance sheet. If goods have been sent by the head office and are still in transit, the head office will pass the following entry on the date of closing:

Goods in Transit Account ….. Dr.

To Branch Account

The rule as to who will pass the entries in respect of cash or goods in transit is not hard. The head office may pass both the entries. For example, if cash sent by branch is still in transit and the entry for adjustment is to be passed in head office books, the entry will be:

Cash in Transit Account ….. Dr.

To Branch Account

The student must be careful to find whether something is in transit. If the balances shown by the branch account and the head office account are the same, nothing is in transit. If there is a difference, it should be assumed that cash (or goods) is in transit and the necessary entry should be passed.

Inter-Branch Transactions:

Where transactions take place between branches themselves, it will facilitate matters if a branch considers all transactions with other branches as if these are with head office. Suppose, Kanpur Branch sends goods to Agra Branch, the various entries to be passed will be as follows:

In Kanpur books:

Head Office Account ….. Dr.

To Goods Supplied to Head Office

In Agra books:

Goods Received from Head Office Account ….. Dr.

To Head Office Account

If each branch has to maintain accounts of all other branches, the ledger may become unwieldy. The head office will, of course, keep accounts of all the branches and will also record inter branch transactions. If, therefore, goods are supplied by Kanpur Branch to Agra Branch, the head office will pass the following entry:

Agra Branch Account ….. Dr.

To Kanpur Branch Account

Or

Agra Branch Account …… Dr.

Goods Received from Kanpur Branch Account ….. Dr.

To Goods Sent to Agra Branch Account

To Kanpur Branch Account

Incorporation of Branch Trial Balance in Head Office Books:

Since to the outside world, there is no difference between the head office and its branches, there must be a consolidated balance sheet if not a consolidated profit and loss account also. The process by which the consolidated balance sheet will be prepared is known as incorporation of branch trial balance. What it involves is that in the head office books, the Trading and Profit and Loss Account of the branch will have to be prepared and after that the combined balance sheet of the branch and head office. There are two ways of doing this.

First method:

In this method, the head office prepares Branch Trading Account Branch Profit and Loss Account.

The entries to be passed are as follows:

  1. Debit Branch Trading Account and credit Branch Account with the total of the items (in Branch Trial Balance) usually debited to a Trading Account, such as Opening Stock, Purchases, Wages, Manufacturing Expenses, etc.
  2. Debit Branch Account and credit Branch Trading Account with the total of items to be credited to the Trading Account Sales and Closing Stock.
  3. Debit Branch Trading Account and credit Branch Profit and Loss Account with gross profit revealed by the Trading Account. (The entry will be reversed if there is a gross loss.)
  4. Debit Branch Profit and Loss Account and credit Branch Account with the total of the various expenses and losses, e.g., Salaries, Rent, Depreciation, Discount Allowed, etc.
  5. Debit Branch Account and credit Branch Profit and Loss Account with the total of gains or incomes such as discount earned.
  6. Debit Branch Profit and Loss Account and credit (General) Profit and Loss Account with the net profit revealed by the Branch Profit and Loss Account. (The entry will be reversed if there is a loss).

The above six steps will enable the consolidated Branch Trading Account and Branch Profit and Loss Account to be prepared. If it is desired to close the books of the branch completely and to record branch assets and liabilities in the head office books for the purpose of preparing a common balance sheet, the following two further entries should be passed:

  1. Debit branch assets individually (such as Branch Debtors, Closing Branch Stock, Cash in Hand at Branch, Cash in Transit, etc.) and credit Branch Account with the total of the assets.
  2. Debit Branch Account and credit branch liabilities, such as Branch Creditors, Branch Expenses Outstanding, etc.

The effect of the eight entries is to balance off the Branch Account. It is not necessary to pass entries Nos. 7 and 8. In that case, the Branch Account will show a balance equal to net assets at the branch i.e., total of branch assets less branch liabilities.

Second method:

Under this method, the Branch Trading and Profit and Loss Account is prepared only as a memorandum account and entry is passed only for net profit or net loss at the branch.

Entries in Branch Books:

The branch books must also the closed. There are two ways of doing this. The first is to transfer all accounts to the head office account-separate entries being passed for revenue items and for assets and liabilities. The second method is to prepare the Trading and Profit and Loss Account and then to transfer the net profit or net loss to the head office account. Head office account will be closed, if assets and liabilities are also transferred if the assets and liabilities are not transferred, the head office account will show a balance equal to the net assets and thus a balance sheet can be prepared.

Under this method, it will be necessary to prepare the Branch Trading and Profit and Loss Account. The first three journal entries given in the first method will also be passed in this case, since they have nothing to do, really, with the closing of books.

If it is desired to close the books completely, assets and liabilities will be transferred to the Head Office Account the entries being exactly the same as the last two given in the first method. The Head Office Account will then balance. In some cases, the branch is not allowed to have full information about the value of goods sent to branch. In such as case, the branch is not informed about it and hence the branch cannot pass any entry in respect of it.

Only the Head Office will pass the appropriate entry in its own books. If such is the policy, the Head Office may not advise the branch about value of anything done by Head Office on behalf of the branch. Branch books will furnish a trial balance, but the information contained therein will be entirely inadequate to prepare the final accounts. In such a case, the branch will close the accounts of revenue items, at least, by merely transferring them to the Head Office Account.

Opening Entries:

Whether an opening entry is required in the books of the head office in the beginning of the year in respect of branch assets and liabilities depends upon what entries were passed at the close of the previous year. If accounts of branch assets and branch liabilities were not transferred to Branch Account, no opening entry will be required. Only the balance in the Branch Account will be carried forward. If the Branch Account was closed by transfer of the branch assets and liabilities, an entry will be required in the beginning of the year to re-transfer the assets and liabilities to the Branch.

Management Notes

Dependent Branches, Meaning, Features, Types

indiafreenotesby indiafreenotes2

Dependent branches are small units or offices of a business that operate under the full control and supervision of the head office. These branches are not allowed to maintain independent or complete sets of accounting records. Instead, they mainly focus on carrying out sales, delivering services, or managing local operations, while all major financial transactions and recordkeeping are handled by the head office.

In dependent branches, the head office sends goods, cash, and instructions regularly. The branch’s primary job is to carry out local activities, collect sales proceeds, and report back to the head office. The branch generally records only basic details like daily sales, expenses, and stock levels, but it does not prepare its own financial statements or maintain a full ledger system. The head office records all the important branch-related transactions in its own books.

Dependent branches are useful when the business wants centralized control over operations, ensuring consistency in pricing, policies, and customer service across different locations. This system helps simplify management for small or medium-sized branches.

Under the dependent branch, two types of branches are included, which is termed as service branch and retail branch.

  • Service Branch: All the branches which are booking or executing orders on behalf of the head office are called service branches. These are the branches that are busy in executing all the orders for the sake of head office.
  • Retail Branch: Retail branches are also dependent branches, but they are concerned with the head office for selling goods, produced by the head office itself or purchased from outside in a bulky position and are sent to the retail selling branches for selling them out as like.

Features of Dependent Branches:

  • Centralized Accounting System

A key feature of dependent branches is that they do not maintain separate accounting records. Instead, all accounting is centralized at the head office. The branch simply records basic information such as cash received or daily sales but does not prepare its own profit and loss or balance sheet. This ensures uniformity and control, as all major transactions are processed and recorded by the head office. This centralized system reduces the need for specialized accounting staff at the branch and simplifies overall financial management.

  • Limited Financial Powers

Dependent branches have limited or no financial authority. They cannot make independent purchases, open bank accounts, or authorize large expenses without the approval of the head office. The head office supplies the goods, sets the prices, and provides the cash required for daily expenses. This limitation ensures the branch strictly follows company policies and reduces the risk of financial mismanagement. The branch’s main focus remains on sales and local operations, not on independent decision-making or financial control.

  • Goods Supplied by Head Office

Another key feature is that dependent branches receive goods directly from the head office. These goods may be sent at cost price, invoice price, or selling price, depending on the company’s internal policies. The branch’s role is to sell these goods to customers and report back the sales details. The branch does not generally purchase goods from local suppliers. This system helps the head office maintain uniform product quality, consistent pricing, and control over inventory movements across all branch locations.

  • Expenses Paid or Reimbursed by Head Office

Dependent branches either receive funds from the head office for their daily expenses or get their local expenses reimbursed later. Typical expenses include rent, salaries, electricity, and local marketing. Since the branch does not maintain a complete set of accounts, these expenses are reported back to the head office for proper accounting. This arrangement ensures the head office remains informed about all costs and can control or reduce unnecessary spending at the branch level, thereby maintaining overall financial discipline.

  • Reporting to Head Office

Dependent branches regularly report their activities to the head office. They send sales summaries, daily cash collections, stock position reports, and lists of local expenses. This information allows the head office to prepare proper branch accounts and determine the profitability or performance of each branch. Reporting is usually done weekly or monthly, depending on the company’s internal system. This constant flow of information helps the head office monitor branch operations, detect issues early, and provide guidance or corrections when necessary.

  • No Separate Final Accounts

Since dependent branches do not keep full accounts, they also do not prepare their own final accounts (profit and loss account or balance sheet). All financial results are compiled and calculated by the head office based on the data received from the branches. This eliminates the need for separate accounting staff at each branch, reducing operational costs. The head office consolidates the branch’s performance into the main accounts, ensuring that the business maintains a unified financial statement covering all its units.

  • Cash Handling and Remittances

Dependent branches collect cash from sales and promptly send the cash to the head office, usually on a daily or weekly basis. They are not permitted to hold large sums of cash or use it for independent purposes. Any small cash needs are either funded by the head office or handled through petty cash, which is later reimbursed. This ensures that funds are not misused at the branch level and that the head office retains full control over the company’s financial resources.

  • Simple Record-Keeping at Branch Level

The record-keeping system at dependent branches is simple and basic. The branch maintains sales registers, cash books, petty cash vouchers, and stock registers, but it does not keep complex accounts like ledgers or trial balances. All detailed accounting work is performed by the head office. This simplified system reduces administrative burdens at the branch and allows branch staff to focus more on sales and customer service rather than on accounting and bookkeeping tasks.

  • Suitable for Small or Medium Operations

The dependent branch system is most suitable for small or medium-sized operations where the volume of business is moderate, and centralized control is desirable. It helps businesses expand geographically without needing to set up complex and expensive accounting systems at each branch. Small retail outlets, sales counters, and local service centers often operate as dependent branches. This system is cost-effective and enables the company to maintain close control over its multiple locations without significantly increasing administrative overhead.

Types of Dependent Branches:

  • Inland or Domestic Branches

These dependent branches operate within the same country as the head office. They are set up to extend the company’s reach in different cities or regions, helping capture new markets and serve customers locally. Inland branches rely heavily on the head office for supplies, pricing decisions, and policy directions. They usually do not maintain full accounting records, and most major financial transactions are routed through the head office. These branches focus mainly on sales, customer service, and local distribution.

  • Foreign or Overseas Branches

Foreign dependent branches are located in other countries but are managed by the head office in the home country. They operate under the close supervision of the head office, which controls key business decisions, pricing, and financing. Despite operating in a foreign environment, they do not maintain separate accounting records, and all financial reporting flows back to the head office. Foreign dependent branches help expand international market presence, but they face additional challenges like currency exchange, local regulations, and cultural differences.

  • Sales Branches

Sales branches focus solely on selling goods provided by the head office. They do not handle manufacturing or local purchasing; instead, they receive finished goods on consignment or at cost price from the head office and concentrate on marketing, sales, and customer interaction. These branches aim to increase market penetration and brand visibility. Their role is purely commercial, and they rely on the head office for supply chain management, inventory control, and pricing decisions, ensuring consistency across all sales points.

  • Service Branches

Service branches provide services, not goods, to customers on behalf of the head office. Common examples include repair centers, customer support offices, or consulting units. While they engage directly with customers, they do not maintain full financial independence. Their expenses, payroll, and service fees are typically managed by the head office. Service branches help companies enhance customer experience and offer specialized services in local markets without the need for complex independent accounting or operations.

  • Receiving Branches

Receiving branches are responsible for collecting cash or payments on behalf of the head office. They may not be involved in direct selling or service delivery but instead focus on the financial side, such as handling customer deposits, installment collections, or payments from local agents. The cash collected is periodically remitted to the head office. Receiving branches are heavily controlled by the head office, which maintains all the accounting records and reconciles the cash flows regularly.

  • Transit or Forwarding Branches

Transit or forwarding branches act as logistical hubs or distribution points. Their main function is to receive goods from the head office and forward them to other branches, dealers, or customers. They do not engage in selling or generating revenue directly. Their role is operational, ensuring smooth and efficient movement of goods. The head office controls all accounting, inventory management, and transportation costs, while the branch focuses on logistics and maintaining accurate delivery schedules.

  • Small Agencies or Commission Branches

These branches operate as small agents or commission points for the head office. They focus on bringing in new business, negotiating contracts, or securing deals on a commission basis. Since they are dependent, they don’t manage financial transactions or maintain separate accounts. The head office handles all invoicing, payments, and contracts. Commission branches are often used in new or remote markets where full-scale branch operations may not yet be feasible but where the company wants a presence.

  • Departmental Branches

Some businesses divide their operations into departmental branches that focus on a specific product line or service within a larger geographic area. Each department functions as a dependent unit reporting back to the head office. For example, a retail store might have separate branches for electronics, clothing, or groceries, all under the same roof but treated as distinct branches for sales tracking. The head office consolidates all departmental records, controls pricing, and sets policies, ensuring consistency across departments.

Dependent Branch Maintained by:

The accounts of the dependent branch are maintained by the Head Office in any one of the following ways;

  1. Debtors System
  2. Stock and Debtors System
  3. Final Account System
  4. Wholesale Branch System

1. Debtors System

Under this system the Head Office opens one Branch Account to record various transactions with the Branch. Branch Account is maintained in the form of a Debtor Account. In the books of the Head Office, Branch Account is debited with the goods supplied and all expenses met by Head Office and credited with all remittances and returns, similar to Customers Account.

Therefore, the system can be called Debtors System or One Account System. The excess of the credit over its debit represents a profit or vice-versa, and is transferred to General Profit and Loss Account of Head Office. Branch Account is prepared in the books of Head Office and is a Nominal Account.

2. Stock and Debtors System

Under the Debtors System, the profit or Joss can be found out by preparing a Branch Account in the books of Head Office. The Branch Account has been treated as a customer, a personal account in an impersonal name. This type of accounting treatment works well in small Branches. When authorised to make credit sales also, the Debtors System proves inadequate. A detail of credit sales remains unaccounted in this system. To overcome this, Stock and Debtors System has been devised.

Under Stock and Debtors System, the Head Office maintains several accounts relating to each Branch.

The following are the accounts to record the branch transactions:

(A) When Goods are Supplied at Cost

  • Branch Stock Account (Real Account): This account is a record of transactions relating to goods and discloses the gross profit or loss of a branch. Head Office can have effective control over the Branch stock.
  • Branch Debtors Account (Personal Account): This account is maintained to keep the transac­tions relating to Branch Debtors.
  • Branch Expense Account (Nominal Account): This account discloses all branch expenses and losses incurred by the Branch.
  • Branch Profit and Loss Account (Nominal Account): This account incorporates the gross profit from Branch Stock Account and expenses from Branch Expense Account. Its balance repre­sents the net results.
  • Goods Sent to Branch Account is prepared to know the goods supplied to and returns received from the Branch.
  • Branch Cash Account reveals all the cash transactions with Branch.

(B) When Goods are Supplied at Invoice Price:

  • Branch Stock Account: This account is maintained to record the transactions of goods at invoice price. This account will not disclose profit or loss, but discloses shortage, surplus or closing stock of goods.
  • Branch Adjustment Account: This account is kept for finding out gross profit made at the Branch. All loadings in the goods sent to the Branch, Opening Balance, Closing Balance, Returns from the Branch, apart from shortages and surpluses etc., are recorded in this account.
  • Branch Debtors Account,
  • Branch Expense Account,
  • Goods Sent to Branch Account, and
  • Branch Profit and Loss Account are explained above.

3. Final Account System (Branch Trading and Profit and Loss Account)

The profit or loss of a dependent Branch can also be known by preparing a Memorandum Branch Trading and Profit and Loss Account. This Account is usually prepared in cost price. Besides the final accounts, Branch Account is also to be prepared. This Branch Account is different from the Branch Account prepared under the Debtors System.

The Branch Account, appearing under Debtors System, is a nominal account. But the Branch Account, appearing under Final Account System, is a personal Account. Generally the Branch Account, under this system, will have debit balance.

4. Wholesale System

There are many producers, now-a-days, who have their own retail shop (Branch). It deals in both retail and wholesale transactions. The profit rates earned by Branches differ between the retail sale and wholesale. Here, it is necessary to account the additional profit made by a Branch through retail trading over the wholesale trading. Wholesale price is always less than retail price.

For instance, the cost of a product is Rs 100, the wholesale price is Rs 140 and the retail price is Rs 160. If the Branch sells the product, the profit will be Rs 60; but the real profit earned by the Branch is Rs 20 (Rs 160 – 140), which is the contribution of Branch. The profit of Rs 40 (Rs 140 – Rs 100) would have been made by the Head Office by selling on wholesale basis to others.

Under this situation, to find out the real profit earned by a Branch, the Head Office charges the Branch with wholesale price. This facili­tates the Head Office to know the retail profit earned by a Branch. In other words, the difference between the wholesale price and selling price is the pure profit on retailing.

The Head Office sends the goods to Branch at wholesale price and in case all the goods have been sold, there is no problem. If not, the unsold goods lying with the Branch will be at invoice price and in such case adjustment for the unrealized profit of the Head Office Trading Account must be made through Branch Stock Reserve Account in order to find out true profit of the concern as a whole.

Management Notes

Consignment Accounts, Introduction, Meaning of Consignment

indiafreenotesby indiafreenotes3

Consignment accounting is a specialized area of accounting that deals with the relationship between a consignor (the owner of goods) and a consignee (the person or entity that sells the goods on behalf of the consignor). Under this arrangement, the consignee holds the goods, sells them, and remits the proceeds to the consignor, while the consignor retains ownership of the goods until they are sold. Consignment accounts help track and record the movement of goods and their financial implications for both parties involved.

In this system, the consignee does not own the goods but acts as an agent of the consignor, meaning the goods remain on the books of the consignor until they are sold to a third party. This system is widely used in industries like retail, agriculture, and manufacturing, where goods are distributed through various channels before reaching the end consumer.

Key Terms in Consignment Accounting:

  1. Consignor:

The owner of the goods who sends them to the consignee for sale. The consignor retains legal ownership of the goods until they are sold by the consignee.

  1. Consignee:

The person or entity that receives the goods from the consignor and is responsible for selling them. The consignee does not own the goods but holds them on behalf of the consignor and earns a commission for the sale.

  1. Consignment:

The act of sending goods from the consignor to the consignee with the purpose of selling them. The sale does not transfer ownership until the goods are sold to the final buyer.

  1. Proforma Invoice:

A document that accompanies the consignment, listing the goods sent and their expected selling prices. It is used for accounting purposes but does not serve as a formal sales invoice.

  1. Commission:

The fee or percentage of sales that the consignee earns for selling the consignor’s goods. The commission is usually agreed upon before the consignment transaction begins.

  1. Del Credere Commission:

An additional commission paid to the consignee for assuming the risk of bad debts. If the consignee offers a del credere commission, they guarantee payment to the consignor, even if the buyer defaults on their payment.

  1. Account Sales:

Statement prepared by the consignee for the consignor that shows the details of goods sold, including sales proceeds, commission, and any expenses incurred during the sales process.

Features of Consignment Accounting:

  • Ownership of Goods:

In a consignment arrangement, the ownership of the goods remains with the consignor until they are sold. Even though the goods are physically located with the consignee, they are not recorded as inventory on the consignee’s books.

  • Risk and Reward:

The risk and rewards associated with the goods remain with the consignor. The consignee is not responsible for unsold goods and only accounts for the goods they have sold.

  • No Sales Revenue Until Sale:

The consignor does not recognize sales revenue until the consignee actually sells the goods. Any goods that remain unsold are recorded as inventory on the consignor’s balance sheet.

  • Consignee’s Commission:

The consignee earns a commission on the goods they sell, which is usually expressed as a percentage of the sales value. This commission is deducted from the sales proceeds before remitting the net amount to the consignor.

  • Expenses on Consignment:

The consignee often incurs expenses in relation to the sale of goods, such as shipping, storage, or marketing costs. These expenses are either borne by the consignee (in which case they are deducted from the sales proceeds) or reimbursed by the consignor.

Accounting Entries in Consignment:

  1. Consignor’s Books:

The consignor must account for goods sent on consignment as well as record any sales made by the consignee and commissions payable to the consignee.

  • Goods Sent on Consignment: When goods are sent on consignment, they are not recorded as a sale. Instead, the consignor debits a Consignment Account and credits Inventory or Goods Sent on Consignment.

Journal Entry:

  • Debit: Consignment Account
  • Credit: Inventory/Stock
  • Expenses Incurred by Consignor: Any expenses incurred by the consignor (e.g., freight or insurance) are debited to the Consignment Account.

Journal Entry:

  • Debit: Consignment Account
  • Credit: Bank/Cash
  • Recording Sales by Consignee: When the consignee sells the goods, the consignor records the sale by debiting Cash or Accounts Receivable and crediting the Consignment Account for the net amount received (sales value minus commission and expenses).

Journal Entry:

  • Debit: Cash/Accounts Receivable (for the amount received)
  • Credit: Consignment Account (net of commission and expenses)
  • Recording Commission: The commission payable to the consignee is recorded by debiting the Consignment Account and crediting the Commission Payable

Journal Entry:

  • Debit: Consignment Account (for the amount of commission)
  • Credit: Commission Payable

  1. Consignee’s Books:

Since the consignee does not own the goods, they do not record the consigned goods as inventory. However, they must record any commissions earned and expenses incurred.

  • Goods Received: The consignee does not make any entry when they receive goods from the consignor, as the ownership remains with the consignor.
  • Sale of Goods: When the consignee sells the goods, they record the cash or receivables from the buyer.

Journal Entry:

  • Debit: Cash/Accounts Receivable (for the sale value)
  • Credit: Consignor’s Account (net of commission and expenses)
  • Commission Earned: The commission earned by the consignee is recorded as revenue.

Journal Entry:

  • Debit: Consignor’s Account (for the commission amount)
  • Credit: Commission Revenue
  • Expenses Incurred: Any expenses paid by the consignee on behalf of the consignor (e.g., shipping costs) are recorded as receivables from the consignor.

Journal Entry:

  • Debit: Consignor’s Account (for the amount of expenses)
  • Credit: Cash/Bank (for the amount paid)

Importance of Consignment Accounting:

Consignment accounting plays a critical role in industries where products are distributed across multiple channels and locations, and where the final sale of goods is not immediately guaranteed. It allows businesses to:

  • Manage Inventory Efficiently:

The consignor can expand their market reach by distributing goods through consignees without the risk of immediate unsold stock.

  • Track Sales Accurately:

Consignment accounting ensures that both consignor and consignee have clear records of sales, expenses, and commissions, facilitating transparency and smooth business transactions.

  • Reduce Risk for Consignees:

Since the consignee is not responsible for the ownership of the goods, they can participate in selling without bearing the risks of holding inventory.

Management Notes

Consignor, Consignee

indiafreenotesby indiafreenotes3

The consignor, in a contract of carriage, is the person sending a shipment to be delivered whether by land, sea or air. Some carriers, such as national postal entities, use the term “sender” or “shipper” but in the event of a legal dispute the proper and technical term “consignor” will generally be used.

If Sender sends a widget to Receiver via a delivery service, Sender is the consignor and Receiver is the consignee.

In a contract of carriage, the consignee is the entity who is financially responsible (the buyer) for the receipt of a shipment. Generally, but not always, the consignee is the same as the receiver.

If a sender dispatches an item to a receiver via a delivery service, the sender is the consignor, the recipient is the consignee, and the deliverer is the carrier.

Consignor vs. Consignee

Now that the idea of consignment is clear, the matter of consignor vs. consignee can be discussed. A consignor is an individual or party that brings a good to be sold on their behalf by another party, which is called the consignee.

The consignee acts as a sort of middleman, which is the individual that buys or retains the goods and passes them along to a third party or the final buyer. Regardless of whether the item is being sold and purchased or simply transferred from one party to the other through the consignee, ownership remains in the hands of the consignor until the deal is finalized, either through payment by or delivery to the final buyer.

The consignor may also be referred to as the shipper, obtaining shipping or transfer documents for the goods they are selling to the consignee. The consignor keeps the title/ownership of the property until it is transferred to or sold to the final party.

Example of a Consignor/Consignee Relationship

To understand the consignor/consignee relationship better, consider the following example. A family is looking to sell its collection of valuable items. They make an arrangement with an auction house to sell the items. Here, the family is the consignor and the auction house is the consignee. The auction house markets the items, but the family retains ownership of them until a third party purchases the items.

Once payment’s been made from the third-party buyer to the auction house the money is turned over to the consignor, minus a fee for the consignee for hosting the items and facilitating the sale. Ownership is then transferred to the buyer.

Consignee

A consignee is the party identified on shipping documents as the recipient of goods to be delivered. This party is responsible for paying customs duties as the designated owner of the goods. The consignee does not formally take possession of the goods until it pays the consignor. The consignor is usually the party that shipped the goods.

The consignee is typically responsible for damage to the goods given into its care, even if ownership still resides with the consignor during the holding period.

An intermediate consignee is a party that receives a shipment on behalf of the ultimate consignee. The ultimate consignee is the intended final recipient of a delivery, which is forwarded to it by the intermediate consignee.

From an accounting perspective, the consignor retains ownership of consigned goods, so these inventory items remain on its balance sheet until such time as they are either sold by the consignee to a third party, or purchased outright by the consignee. The consignor does not record a sale transaction when goods are initially shipped to the consignee, since the consignor still owns the goods. A sale transaction for the consignor only occurs when goods are sold to a third party or bought outright by the consignee.

From the perspective of the consignee, goods received on consignment do not appear on its balance sheet, since it does not own the inventory. Instead, it records a commission on any sales to third parties.

Consignor

A consignor is the party who delivers goods that they own to another party to hold and sell them on their behalf. In other words, it’s the owner of a product who allows a store to take possession of it in order to sell it for him or her.

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