by Consignment is a business arrangement where one person (the consignor) sends goods to another person (the consignee) for the purpose of sale on behalf of the consignor. The consignee does not purchase the goods but merely takes possession to sell them as an agent. The ownership of the goods remains with the consignor until they are sold to the ultimate customer. The consignee earns a commission on the sales made and remits the sale proceeds to the consignor after deducting expenses and commission. Consignment is not a sale; it is a transfer of possession, not ownership, for the purpose of selling goods in a different market.
Characteristics of Consignment:
1. Ownership Remains with Consignor
In a consignment arrangement, the ownership of goods remains with the consignor until the goods are sold by the consignee. The consignee only acts as an agent and does not become the owner of the goods. Any unsold goods continue to belong to the consignor. This feature distinguishes consignment from a normal sale, where ownership is transferred immediately to the buyer.
2. Consignee Acts as an Agent
The consignee receives goods from the consignor and sells them on the consignor’s behalf. The consignee acts as an agent and earns commission for the services rendered. Since the consignee is not the owner of the goods, he is not liable for losses except those arising from negligence. The consignee performs functions such as storage, marketing, and sale of goods.
3. Profit or Loss Belongs to Consignor
All profits arising from the sale of consigned goods belong to the consignor. Similarly, any loss incurred in the consignment business is also borne by the consignor. The consignee receives only the agreed commission and does not share in the profit or loss unless specifically agreed upon. This feature reflects the agency relationship between the parties.
4. Separate Accounting Required
Consignment transactions require separate accounting records to determine the profit or loss on consignment. A Consignment Account is prepared to record all expenses, sales, and revenues relating to the consignment. This helps in evaluating the performance of each consignment separately and ensures accurate financial reporting.
5. Commission is Paid to Consignee
The consignee is entitled to receive commission for selling the goods on behalf of the consignor. The commission may be ordinary commission, del credere commission, or overriding commission depending on the agreement. Commission serves as remuneration for the services provided by the consignee and is treated as an expense in the books of the consignor.
6. Risk is Borne by Consignor
Since ownership of the goods remains with the consignor, the risk associated with the goods is generally borne by the consignor. Any loss due to theft, accident, or damage is usually suffered by the consignor unless it occurs because of the consignee’s negligence. Thus, the consignor bears the major business risk in a consignment transaction.
7. Unsold Stock Remains with Consignor
At the end of an accounting period, some goods may remain unsold with the consignee. Such unsold goods are known as consignment stock and continue to be the property of the consignor. The value of unsold stock is calculated and shown in the consignor’s books, ensuring correct determination of profit or loss on consignment.
8. No Debtor-Creditor Relationship
A consignment transaction does not create a debtor-creditor relationship between the consignor and consignee. The consignee is merely an agent responsible for selling goods and remitting the sale proceeds to the consignor. Therefore, the relationship between the parties is that of principal and agent rather than buyer and seller.
9. Goods Sent Are Not Sales
The dispatch of goods to the consignee does not constitute a sale. It is only a transfer of goods from the consignor to the consignee for the purpose of sale. A sale takes place only when the consignee sells the goods to a third party. Hence, goods sent on consignment are not recorded as sales at the time of dispatch.
10. Based on Mutual Trust
Consignment business is based on mutual trust and cooperation between the consignor and consignee. The consignor relies on the consignee for proper handling and sale of goods, while the consignee depends on the consignor for regular supply. Honest reporting and transparent dealings are essential for the successful operation of a consignment arrangement.
Consignment Accounts:
Consignment accounts are special accounting records maintained by the consignor to track goods sent to the consignee for sale on their behalf. Since ownership remains with the consignor until the goods are sold, the consignor must account for the entire transaction, including the cost of goods, freight, insurance, and all expenses incurred in dispatching and selling the consignment. The consignee renders an account sales periodically, detailing gross sales, expenses incurred, commission earned, and the net proceeds remitted. The consignor prepares a consignment account in their books to ascertain profit or loss on each consignment separately. This account is debited with all costs and credited with sales proceeds.
Important Terms in Consignment Accounting:
1. Consignor
The consignor is the owner of the goods who sends them to another person for sale on consignment. The consignor bears all risks and rewards associated with the goods until they are sold. He records all consignment transactions in his books and prepares the Consignment Account to ascertain profit or loss. The consignor is responsible for expenses incurred before dispatch and pays commission to the consignee for selling the goods.
2. Consignee
The consignee is the person who receives goods from the consignor and sells them on the latter’s behalf. The consignee acts as an agent and earns commission for services rendered. He is responsible for taking reasonable care of the goods and remitting the sale proceeds to the consignor after deducting expenses and commission. The consignee does not become the owner of the goods.
3. Consignment
Consignment refers to the arrangement under which goods are sent by the consignor to the consignee for sale. Ownership of the goods remains with the consignor until they are sold. The consignee sells the goods and receives commission for the service. Consignment helps businesses expand their market without establishing their own sales outlets in different locations.
4. Proforma Invoice
A Proforma Invoice is a statement sent by the consignor to the consignee along with the goods. It contains details such as quantity, description, price, and value of goods dispatched. It is not an actual invoice and does not create a debtor-creditor relationship. Its purpose is to provide information about the goods sent on consignment.
5. Account Sales
Account Sales is a statement prepared and sent by the consignee to the consignor periodically. It contains details of goods sold, expenses incurred, commission earned, and the balance amount payable to the consignor. This statement helps the consignor determine the profit or loss on consignment and verify the activities performed by the consignee.
6. Commission
Commission is the remuneration paid by the consignor to the consignee for selling goods on consignment. It is usually calculated as a percentage of sales. Commission may be ordinary commission, del credere commission, or overriding commission depending on the agreement between the parties. It is treated as an expense in the books of the consignor.
7. Del Credere Commission
Del Credere Commission is an additional commission paid to the consignee for guaranteeing the collection of credit sales. When this commission is paid, the consignee bears the risk of bad debts arising from credit customers. The consignor is protected from losses due to non-payment by customers. It is generally paid in addition to ordinary commission.
8. Overriding Commission
Overriding Commission is an extra commission paid to the consignee for achieving specific objectives, such as selling goods above a certain price or promoting new products. It is paid in addition to ordinary commission. This commission acts as an incentive and motivates the consignee to increase sales and earn higher profits for the consignor.
9. Normal Loss
Normal Loss refers to the unavoidable loss of goods arising from their inherent nature during transit or storage. Examples include evaporation, leakage, drying, or spoilage. Such losses are expected and cannot be prevented. The cost of normal loss is absorbed by the remaining goods, increasing their per-unit cost for valuation purposes.
10. Abnormal Loss
Abnormal Loss refers to the unexpected loss of goods caused by accidents, fire, theft, flood, or negligence. Such losses are not inherent in the nature of goods and can often be avoided. Abnormal loss is calculated separately and recorded in the books to determine the actual profit or loss on consignment. It is not included in the cost of remaining goods.
11. Consignment Stock
Consignment Stock refers to the unsold goods lying with the consignee at the end of an accounting period. Since ownership remains with the consignor, these goods are valued and shown as closing stock in the consignor’s books. Proper valuation of consignment stock is essential for accurate determination of profit or loss on consignment.
12. Non-Recurring Expenses
Non-Recurring Expenses are expenses incurred to bring the goods to the consignee’s location and make them ready for sale. Examples include freight, carriage, customs duty, and insurance during transit. These expenses are added to the cost of goods and considered while valuing consignment stock and calculating consignment profit.
13. Recurring Expenses
Recurring Expenses are expenses incurred after the goods reach the consignee’s premises. Examples include warehouse rent, storage charges, advertising, and selling expenses. These expenses are incurred regularly during the selling process and are charged to the Consignment Account but are not included in the valuation of closing stock.
Journal Entries of Consignment Accounts
In the Books of Consignor
| Transaction | Journal Entry |
|---|---|
| Goods Sent on Consignment | Consignment A/c Dr. To Goods Sent on Consignment A/c |
| Expenses Paid by Consignor | Consignment A/c Dr. To Cash/Bank A/c |
| Expenses Incurred by Consignee | Consignment A/c Dr. To Consignee’s A/c |
| Sales Made by Consignee | Consignee’s A/c Dr. To Consignment A/c |
| Commission Due to Consignee | Consignment A/c Dr. To Consignee’s A/c |
| Abnormal Loss Occurred | Abnormal Loss A/c Dr. To Consignment A/c |
| Insurance Claim Received | Bank A/c Dr. To Abnormal Loss A/c |
| Unsold Stock (Closing Stock) | Consignment Stock A/c Dr. To Consignment A/c |
| Profit on Consignment | Consignment A/c Dr. To Profit & Loss A/c |
| Loss on Consignment | Profit & Loss A/c Dr. To Consignment A/c |
| Amount Received from Consignee | Bank A/c Dr. To Consignee’s A/c |
In the Books of Consignee
| Transaction | Journal Entry |
|---|---|
| Expenses Paid on Behalf of Consignor | Consignor’s A/c Dr. To Cash/Bank A/c |
| Commission Earned | Consignor’s A/c Dr. To Commission A/c |
| Sales Made on Consignment | Cash/Bank/Debtors A/c Dr. To Consignor’s A/c |
| Amount Remitted to Consignor | Consignor’s A/c Dr. To Cash/Bank A/c |
Summary
| Particulars | Treatment |
|---|---|
| Goods Sent | Debited to Consignment A/c |
| Sales | Credited to Consignment A/c |
| Expenses | Debited to Consignment A/c |
| Commission | Debited to Consignment A/c |
| Closing Stock | Credited to Consignment A/c |
| Profit/Loss | Transferred to Profit & Loss A/c |
Features of Consignment Accounts:
1. Principal-Agent Relationship
Consignment accounting is based on the relationship between the consignor and the consignee. The consignor acts as the principal and the consignee acts as an agent. The consignee sells goods on behalf of the consignor and earns commission for the services rendered. This relationship forms the foundation of all consignment transactions and accounting records.
2. Ownership Remains with Consignor
In consignment accounting, ownership of the goods remains with the consignor until the goods are sold to the final customer. The consignee only possesses the goods for the purpose of sale and does not become their owner. Unsold goods continue to belong to the consignor and are shown as closing stock in his books.
3. Separate Consignment Account
A separate Consignment Account is prepared for each consignment transaction. All expenses, losses, sales, and revenues relating to the consignment are recorded in this account. The account helps determine the profit or loss arising from the consignment and ensures proper accounting treatment of all related transactions.
4. Commission-Based Remuneration
The consignee receives commission as compensation for selling the goods on behalf of the consignor. The commission may be ordinary commission, del credere commission, or overriding commission. It is treated as an expense in the books of the consignor and income in the books of the consignee.
5. Recording of Consignment Expenses
All expenses incurred by the consignor and consignee in connection with the consignment are recorded in the Consignment Account. These expenses may include freight, carriage, insurance, warehousing, and selling expenses. Proper recording of expenses helps determine the true profit or loss from the consignment.
6. Valuation of Unsold Stock
Unsold goods remaining with the consignee at the end of the accounting period are valued and recorded as consignment stock. The valuation includes the cost of goods and proportionate non-recurring expenses. Accurate valuation of closing stock is necessary for determining the correct profit or loss on consignment.
7. Treatment of Normal and Abnormal Losses
Consignment accounting separately records normal and abnormal losses. Normal loss is unavoidable and is absorbed by the remaining goods. Abnormal loss is unexpected and is calculated separately. This distinction ensures proper valuation of stock and accurate determination of profit or loss.
8. Account Sales as a Basis of Recording
The consignee periodically sends an Account Sales statement to the consignor. This statement contains details of sales, expenses, commission, and the amount due to the consignor. The consignor uses this information to record transactions and prepare the Consignment Account.
9. No Sale on Dispatch of Goods
When goods are sent to the consignee, it does not constitute a sale. The transfer is only for the purpose of selling the goods on behalf of the consignor. Revenue is recognized only when the consignee sells the goods to third parties. This is a distinctive feature of consignment accounting.
10. Determination of Profit or Loss
One of the main features of consignment accounting is the determination of profit or loss on each consignment separately. After considering sales, expenses, commissions, losses, and closing stock, the balance of the Consignment Account reveals the profit or loss earned from the consignment transaction.
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