Tag: Chart of Accounts

Consignment account is prepared to ascertain the profit earned or loss incurred by the consignor on a specific consignment. This account can be viewed as a combined trading and profit and loss account prepared specifically for consignment business.

The nature of the consignment account is nominal which means it is drawn up to show the results of the consignment business for a specific period.

If consignor sends goods to more than one consignee working in different cities or areas, a separate consignment account is required for each consignment so that the profit or loss for each consignment can be determined separately. If consignor maintains more than one consignment accounts, he can distinguish them from each other by adding to the account title the name of the consignee or the name of the city or area to which the particular consignment belongs. For example, Consignment to David, Consignment to John, Consignment to Ottawa and consignment to New York etc.

Debit and credit entries in a consignment account

The entries in the consignment account are made on the basis of consignor’s own record as well as account sales sent by the consignee. The debit and credit entries are made as follows:

Debit entries

The common entries that appear on the debit side of a consignment account are listed below:

• Opening stock of goods
• Total cost of goods sent on consignment
• All the expenses incurred by consignor such as loading, freight, insurance etc.
• All the expenses paid by consignee such as unloading, freight, godwon rent, warehousing and storage, marketing expenses, packaging and selling expense etc.
• Bad debts regarding consignment sales.
• Consignee’s ordinary and del credere commission at agreed rate on sale proceeds.

Credit entries

The usual items that appear on the credit side of a consignment account are listed below:

• Gross sale proceeds
• Closing stock of goods
• Abnormal loss of goods
• Stock in transit

The balance of consignment account represents a profit or a loss on consignment and is transferred to “Profit and Loss on Consignment Account”. The consignment account is thus closed.

The Profit and Loss on Consignment Account is also a nominal account. If there are more than one consignment, the balances of all consignment accounts are transferred to this account.

The profit and loss on consignment account is closed at the end of the year by transferring its balance to the General Profit and Loss Account.

Proforma Invoice

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.

Invoice Price

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:

1. Consignment stock at the beginning
2. Goods sent on consignment
3. Goods returned by the consignee
4. 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

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

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.

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.

Recurring Expenses

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.

Ordinary Commission

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

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.

Normal Loss

• 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

• 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.

A consignor may have some incomplete consignments at the end of his accounting year. An incomplete consignment means that there are some unsold units of goods with the consignee when the accounting period of the consignor comes to an end. These unsold units are termed as closing stock on consignment (or just stock on consignment for short) and need to be properly valued. After valuation, the stock on consignment must be brought into the books and credited to the consignment account so that the profit earned on consignment during the period can be computed correctly. The journal entry for this purpose is given below:

Stock on consignment A/C [Dr]

Consignment A/C [Cr]

The stock on consignment is an asset and is, therefore, shown on the year end balance sheet. In the next accounting period when consignment account is prepared, this stock appears as the first item on the debit side of this account. The following journal entry is made for this purpose:

Consignment A/C [Dr]

Stock on consignment A/C [Cr]

Valuation of stock on consignment

The stock on consignment, like in many other business situations, should be valued using lower of cost or market price principle. The major issue in this regard is the ascertainment of cost price and market price of goods in stock. The rest of this article talks about the procedures of determining these two prices.

Cost price

The total cost of goods is equal to the expenditures incurred by consignor to bring the goods in salable condition plus all the expenditures paid by consignor as well as consignee in the course of transferring those goods to the consignee’s place. These expenditures usually include carriage, freight, insurance, import and export duties, loading and unloading expenses etc. These expenditures are popularly referred to as non-recurring expenditures.

Any expenditures incurred after the goods have reached to the consignee’s place should be ignored for the purpose of computing the value of closing stock on consignment. Usual examples of such expenditures include warehouse rent, warehouse insurance, storage expenses, carriage paid for the delivery of goods to customers, marketing expenses or any other payment made for the sale of goods.

Net realizable value (NRV)/market price

Net realizable value (NRV) of stock is determined by deducting from the market price of stock the possible expenses required to complete the sale of stock including consignee’s commission. Suppose, for example, 100 units of product X are in stock with a consignee and the sales price of one unit of product is $20. The total sales or market price of this stock would be $2,000 (= 100 units × $20). Now if the estimated expenses required to sell this stock are $300 and consignee’s commission on sale is $200, the net realizable value of stock would be $2,000 (= $2,500 – $500).

After computing the cost price and net realizable value (NRV) in accordance with the procedures explained above, the smaller one should be used as the value of closing stock. If no indication regarding the market price or net realizable value is available in an examination problem or a homework assignment, the students should assume that the cost price is lower than the net realizable value. The valuation of stock on consignment should therefore be done on the basis of cost price.

Formula and format for computing closing stock on consignment

For cost price

If cost price method is applicable, the students should follow the following format for computing the value of closing stock:

After computing the total cost using above format, the following formula can be used to find the value of stock on consignment:

Cost of stock on consignment = (Total cost/Total number of units) × Units in stock

Alternatively, the value of stock can also be computed as follows:

For net realizable value (NRV)

If net realizable value method is applicable, the following formula should be used to compute the value of stock on consignment.

Net realizable value = Market price of stock – (Expected expenses to be incurred to sell the stock + Consignee’s commission)

Adjusting entries are made at the end of an accounting period after a trial balance is prepared to adjust the revenues and expenses for the period in which they occurred.

Adjusting entries must involve two or more accounts and one of those accounts will be a balance sheet account and the other account will be an income statement account. You must calculate the amounts for the adjusting entries and designate which account will be debited and which will be credited. Once you have completed the adjusting entries in all the appropriate accounts, you must enter it into your company’s general ledger.

These entries are posted into the general ledger in the same way as any other accounting journal entry. The purpose of adjusting entries is to show when money changed hands and to convert real-time entries to entries that reflect your accrual accounting.

5 Accounts That Need Adjusting Entries

Adjusting entries are a crucial part of the accounting process and are usually made on the last day of an accounting period. They are made so that financial statements reflect the revenues earned and expenses incurred during the accounting period.

Adjusting entries impact five main accounts.

1) Accrued Revenues

For any service performed in one month but billed in the next month would have adjusting entry showing the revenue in the month you performed the service.

You make the adjusting entry by debiting accounts receivable and crediting service revenue.

2) Accrued Expenses

Wages paid to an employee is a common accrued expense.

To make an adjusting entry for wages paid to an employee at the end of an accounting period, an adjusting journal entry will debit wages expense and credit wages payable.

3) Unearned Revenues

Payments for goods to be delivered in the future or services to be performed is considered an unearned revenue.

For example, if you place an online order in September and that item does not arrive until October, the company who you ordered from would record the cost of that item as unearned revenue. The company would make adjusting entry for September (the month you ordered) debiting unearned revenue and crediting revenue.

4) Prepaid Expenses

Prepaid expenses refer to assets that are paid for and that are gradually used up during the accounting period. A common example of a prepaid expense is a company buying and paying for office supplies.

During the accounting period, the office supplies are used up and as they are used they become an expense. When office supplies are bought and used, an adjusting entry is made to debit office supply expenses and credit prepaid office supplies.

5) Depreciation

Depreciation is the process of assigning a cost of an asset, such as a building or piece of equipment over the economic or serviceable life of that asset.

Adjusting entries for depreciation are a little bit different than with other accounts. A company has to consider accumulated depreciation.

Accumulated depreciation refers to the accumulated depreciation of a company’s asset over the life of the company. On a company’s balance sheet, accumulated depreciation is called a contra-asset account and it is used to track depreciation expenses.

Adjusting journal entries are accounting journal entries that update the accounts at the end of an accounting period. Each entry impacts at least one income statement account (a revenue or expense account) and one balance sheet account (an asset-liability account) but never impacts cash.