Tag: Double Entry

When a company sells an investment, it results in a gain or loss which is recognized in income statement. A gain on sale of investment arises when the (disposal) value of an investment exceeds its cost. Similarly, a capital loss is when the value of investment drops below its cost.

Accounting treatment of a disposal of investment depends on:

• The nature of the investment i.e. whether it is a share of common stock, preferred stock, a bond, etc.,
• The extent of the investment i.e. the percentage holding, and
• The initial recognition and continuing accounting of the investment.

Investments in shares of common stock are accounted for using either the fair value through profit and loss, fair value through other comprehensive income, equity method or consolidation depending on the extent of ownership.

An association of two or more persons or we may say temporary partnership combined for the carrying out a specific business, and divide profit or loss thereof in agreed ratio is called a Joint Venture. Concerned parties to joint venture are known as co-venturers. The liabilities of co-venturers are limited to their profit sharing ratio or as per agreed terms:

Suppose ‘A’ and ‘B’ undertake the job to develop a park for a consideration of Rs. 10,000/- Lacs. Since they come together for a work on a specific project, it will termed as joint venture and each of them (A and B) will be called as a co-venturer. Further, this venture will automatically terminate once the project is completed.

Major Features and Characteristics of Joint Venture

• There is an agreement between two or more persons.
• Joint venture is made for the specific execution of a business plan/project.
• It is a temporary partnership without the use of a firm name.
• Agreement for joint ventures is automatically dissolved as soon as specific project is over.
• Profit & Share are shared on the same terms and conditions agreed upon. However, in the absence of any agreement, profit & share will be divided equally.

Salient Features of Joint Venture

1. Agreement: Two or more firms come to an agreement, to undertake a business, for a definite purpose and are bound by it.
2. Joint Control: There exist a joint control of the co-venturers over business assets, operations, administration and even the venture.
3. Pooling of resources and expertise: Firms pool their resources like capital, manpower, technical know-how, and expertise, which helps in large-scale production.
4. Sharing of profit and loss: The co-venturers agree to share the profits and losses of the business in an agreed ratio. The computation of the profit and loss is usually done at the end of the venture, however, when it continues for the long duration, the profit and loss is calculated annually.
5. Access to advanced technology: By entering into joint venture firms get access to various techniques of production, marketing and doing business, which decreases the overall cost and also improves quality.
6. Dissolution: Once the term or purpose of the joint venture is complete, the agreement comes to an end, and the accounts of the coventurers, are settled, as and when it is dissolved.

The co-venturers are free to carry on their own business, unless otherwise provided in the joint venture agreement, during the life of the venture.

Partnership and Joint Venture

There are following differences between partnership and joint venture −

• Partnership always carried on with firm’s name, but for the joint venture, no such firm’s name is required.
• The persons who run the business on partnership are called as partners and the persons who agreed to take the project as joint venture are called as co-venturers.
• Normally, a partnership is constituted for a long period (including various projects), whereas joint venture is formed to complete a specific job/project.
• Partnership is governed under the Partnership Act, 1932, whereas there is no enactment of such kind for the joint ventures. However, as a matter of fact in law, a joint venture is treated as a partnership.
• There is no limit specified for the numbers of co-venturers, but the number of partners is limited to 10 under banking business and 20 for any other trade or business.
• Liability of a partner is unlimited and may extent of his business and personal estate, whereas under joint venture, liabilities of co-venturers are limited to the particular assignment or project agreed upon.

Joint Venture and Consignment

Major differences between joint venture and consignment may be summarized as −

• Relationship: The co-venturers of a Joint venture are the owners of a Joint venture, whereas relationship of a consignor and consignee is of owner and Agent.
• Sharing of Profits: There is no distribution of profit between a consignor and consignee, consignee only gets commission on sale made by him. On the other hand, the co-venturers of a joint venture share profits as per the agreed profit sharing ratio.
• Ownership of Goods: Ownership of the goods remains with the consignor. Consignor transfers only possession to the consignee, but every co-venturer of a joint venture is the co-owner of the goods/project.
• Contribution of Funds: Investment is done by the consignor only. On the other hand, funds are contributed by all co-ventures in a certain agreed proportion.
• Continuity of Business: In case of a joint venture, there is no continuity of the business once project is completed. On the other hand, if, everything goes smooth, consignment is a continuous process.

Accounting Records

To keep a record of the joint venture transactions, there are three following types of accounting methods:

• When one of the Venturers keeps Accounts,
• When Separate Books of Accounts are kept for the Joint Venture, and
• When Separate Books of Accounts are not kept for the Joint Venture.

Let’s discuss each of them separately:

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 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.

Objectives of Joint Venture

• To enter foreign market and even new or emerging market.
• To reduce the risk factor for heavy investment.
• To make optimum utilisation of resources.
• To gain economies of scale.
• To achieve synergy.

Joint ventures are primarily formed for construction of dams and roads, film production, buying and selling of goods etc.

The type of joint venture is based on the various factors like, the purpose for which it is formed, number of firms involved and the term for which it is formed.

Key differences between Joint Venture and Consignment

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.

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.

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.

Consignment refers to an arrangement where the consignor (owner of goods) sends goods to the consignee (agent) for sale on behalf of the consignor. The consignee does not take ownership of the goods but sells them and earns a commission on the sales made.

1. Journal Entries in the Books of Consignor

The consignor records the consignment transaction using a Consignment Account to determine the profit or loss from the consignment. The following are the key entries:

2. Journal Entries in the Books of Consignee

Since the consignee acts as an agent, they do not record the consignment as their purchase. They only record the expenses incurred, commission earned, and the remittance to the consignor. The following are the key entries:

illustrative Example

Scenario:

• A consignor, XYZ Ltd., sends goods costing ₹1,00,000 to a consignee, ABC Traders.
• Expenses incurred by XYZ Ltd. on freight and insurance amount to ₹5,000.
• ABC Traders incurs unloading expenses of ₹2,000 and sells the goods for ₹1,20,000.
• ABC Traders is entitled to a commission of 10% on sales.
• ABC Traders remits the balance to XYZ Ltd. after deducting commission and expenses.

Journal Entries in the Books of Consignor (XYZ Ltd.)

Journal Entries in the Books of Consignee (ABC Traders)

Explanation

• Consignor’s Books

The consignor records the consignment transaction, including the value of goods sent, expenses incurred, sales made, and the commission paid to the consignee. The profit or loss on consignment is determined at the end by comparing the total revenue with the total expenses.

• Consignee’s Books

The consignee only records transactions related to expenses incurred, sales made on behalf of the consignor, and commission earned. Since the consignee is an agent and not the owner of the goods, no purchase or inventory entry is made.