Consignment Accounts, Introduction, Meaning of Consignment

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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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

2. 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.