Proforma Invoice, Invoice Price, Account Sales, Non-recurring Expenses, Recurring Expenses, Ordinary Commission, Overriding Commission, Del Credere Commission, Normal Loss, Abnormal Loss23/12/2020
A proforma invoice (also written as pro forma invoice) is one of the documents used in consignment business which contains information regarding the description of goods sent on consignment and the price at which those goods can be sold by the consignee. This document is prepared by consignor and sent to the consignee along with the goods.
The proforma invoice and invoice are not the same and should not be confused with each other. An invoice is sent by a seller to the buyer to provide him the details of goods sold or services provided to him, price of those goods or services and the agreed terms of payment. It indicates seller’s demand for payment after a sale has taken place. A proforma invoice, on the other hand, is not a demand for payment rather it is a memorandum invoice which tells what the actual invoice would be.
Where goods are consigned abroad, the proforma invoice plays an important role in custom clearance. The custom officer uses the information from proforma invoice in conjunction with the general physical examination of the goods to determine the total value of goods and the amount of imposable duty. Many international traders use consignment model of business and attach proforma invoices to their across-the-border shipments.
The Consignor, instead of sending the goods on consignment at cost price, may send it at a price higher than the cost price. This price is known as Invoice Price or Selling Price. The difference between the cost price and the invoice price of goods is known as loading or the higher price over the cost. This is done with a view to keep the profits on consignment secret.
As such, consignee could not know the actual profit made on consignment. Hence the consignor sends the Proforma invoice at a higher price than the cost price. When the consignor records the transaction in his book at invoice price, some additional entries have to be passed in order to eliminate the excess price and to arrive at the correct profit or loss on consignment.
Items on Which Excess Price is to be Calculated:
Excess Price or Loading is to be calculated on the following items:
- Consignment stock at the beginning
- Goods sent on consignment
- Goods returned by the consignee
- Consignment stock at the end of the period
(a) To Remove the Excess Price in the Opening Stock:
Consignment Stock Reserve A/c Dr.
To Consignment Account
(Being the excess value of opening stock is brought down to cost price)
(b) To Remove the Excess Price in the Goods Sent on Consignment:
Goods sent on Consignment Account Dr.
To Consignment Account
(Being the difference between the invoice price and cost price is adjusted)
(c) To Remove the Excess Price in Goods Return:
Consignment Account Dr.
To Goods sent on Consignment A/c
(Being to bring down the value of goods to cost price)
(d) To Remove the Excess Price in Closing Stock:
Consignment Account Dr.
To Consignment Stock Reserve A/c
(Being the excess value of stock is adjusted)
But these adjustments are not needed in consignee’s book. Invoice price does not affect the consignee. When the stock is shown in the Balance Sheet, in Consignor’s Book, the Consignment Stock Reserve is deducted.
Account sales is a statement specifying the price at which the goods are sold, the commission earned by the consignee, the expenses incurred by the consignee on behalf of the consignment and the net balance for which the consignee is liable. It is prepared by the consignee and does not have a fixed or specified format.
Non-recurring expenses are incurred for bringing the goods from the place of the consignor to the place of the consignee. Hence, all the expenses incurred till the goods reach the godown of the consignee are non-recurring expenses. These expenses are incurred only once on a particular consignment. It will increase the value of goods. These expenses are paid by the consignor or by the consignee on behalf of the consignor.
|Non-recurring expenses of the consigner||Non-recurring expenses of the consignee-|
2. Transport or carriage
4. Dock dues
5. Landing charges
|1. Unloading charges
2. Railway dues
3. Dock Dues
4. Import Duty or Customs Duty
6. Carriage to godown/shop
The abovementioned expenses do not occur again like the recurring expenses. These expenses are met on the whole consignment. These expenses are added to the cost of the consignment so as to arrive at the cost price of goods at the point of sale. Again these are taken into consideration when the value of closing stock and abnormal losses are calculated.
These expenses are incurred after the goods have been received at consignee’s godown. These expenses are incurred quite often and of recurring in nature. These expenses occur regularly at fixed intervals. Generally these expenses are incurred after the goods have reached the place of business by consignee. They are met by the consignor or consignee. These expenses do not increase the value of goods.
The ordinary commission is the fees payable by the consignor to the consignee for the sale of goods when there is no guarantee for the collection of money from the consumer. The percent (%) of the commission is lower in such a case.
Overriding commission is a type of commission which a consignor grants to the consignee who achieves a specific sales target or whose total sales revenue exceeds a specified amount. It encourages consignee to realize the best possible price for goods sold. Sometime it is given to consignee as an incentive for putting his efforts to introduce, promote and create market for a new product in certain areas.
Overriding commission is an extra commission which is awarded to the consignee in addition to his ordinary or regular commission.
Del Credere Commission
Del Credre Commission is the additional amount which the consignor pays to the consignee for taking the responsibility of collection of debt from the customers.
When the customers make default in payment, consignee charges the amount of loss of bad debts in his books. We calculate this commission on Total sales.
- It occurs due to the nature of goods shipped like leakage, evaporation, perishable goods etc.
- We add the normal loss to the cost of goods and thus, it also impacts the gross profit.
- Normal loss is not covered by insurance companies.
- It is certain but it varies from time to time.
- Abnormal loss occurs due to unforeseen circumstances like an accident, natural calamity, fire damage etc.
- The abnormal loss does not impact the gross profit of the entity.
- Generally, insurance covers an abnormal loss.
- The abnormal loss is not certain due to unforeseen circumstances and situations.