ACCOUNTING FOR CONSIGNMENTS

ACC 123

Consignment

• Sometimes, it is economical for manufacturer or wholesaler to appoint agents to sell goods on behalf

• Despatch of goods from one person to another person fort the purpose of of selling is termed as ‘consignment’

• Goods so sent are termed as ‘goods sent on consignment’

• The sender is called ‘consignor’ and the recipient ‘consignee’

• Goods sent to agents remain property of the sending firm, not the agents.

Main features of consignment

• Consignment of goods is not a sale.• The consignee sells goods at the risk of the

consignor.• The sales proceed belong to the consignor and

the consignee gets commission• The relationship between the consignor and

consignee is that of Principal and Agent

Remuneration to Consignee

• A commission is paid to the consignee for selling goods on behalf of the consignor

• If the consignee guarantees collection of all trade debts, additional commission called ‘del credere’ commission is paid

• Periodically the consignee sends an ‘account sale’ (not an Account real but it is a statement) to consignor showing sales made, expenses paid, commission due and amount remitted or remittable to consignor

A specimen copy of an account sale

• Account sale of 100 cases of sports materials sold on behalf of Paul

» Signature » Date

Date Particulars Rate Shs Shs

Dec1

Dec 15

40 cases of radio

10 radio

Less: Expenses &Charges:

Carriage 700

Custom duty 2000

Insurance 1300

Selling expenses 500

Less: Commission @5% 500

Less: Amount remitted by bank draft

Balance due

1,200

1,100

48,000

11.000

4,500

2,950

59,000

7,450

51,550

20,000

31,550

Important terms

• Proforma Invoice: a statement prepared y the consignor stating the quantity, quality, and price of goods.

• Direct expenses: All expenses till the goods reach the godown of consignee.

• Non recurring nature and increase value of goods. E.g. freight, carriage, insurance, loading and unloading charges

• Indirect expenses: incurred after the goods reach consignee godown.

• They are of recurring nature and do not increase the value of goods. E.g. godown rent, storage charges, advertisement expenses, salaries of salesmen etc.

• Note: Distinction between direct and indirect expenses is of special importance at the time of valuation of unsold stock.

• Direct expenses form a part of the cost, therefore, a portion of such expenses is included in the cost of stock.

• Indirect expenses do not form part of the cost and are, therefore, excluded while valuing unsold stock

Consignor’s(the trader’s) Records

• Consignor usually maintains three accounts:

Consignment AccountConsignee AccountGoods sent on Consignment account

• For each consignment to an agent a separate consignment account is opened.

• Think of it as a trading profit and loss account for each consignment

• The purpose is to calculate the net profit or loss on each consignment

Consignor’s(the trader’s) Records

1. On sending goods to consignee • With the cost of the goods

Dr. Consignment accountCr. Goods sent to on Consignment account (stock a/c)

2. Expenses paid or incurred in connection with the consignmentDr. Consignment accountCr. Cash/bank

Expense of the agent(consignee) and sales receipt

• On receipt of account of sales the consignor enters those details in his books.

3. With the Sales made by the consignee Dr. Consignee’s accountCr. Consignment account

4. With the expenses incurred by the consigneeDr. Consignment accountCr. Consignee’s account

5. With commission of consignee Dr. Consignment accountCr. Consignee’s account

6. With the money received from consignee Dr. Cash/BankCr. Consignee’s account

• The balancing figure on the consignment account is a profit or loss on consignment to be taken to the main Income Statement

• The balance on Goods sent on Consignment transferred to Income Statement in the determination of gross profit.

Consignee’ (the agent’s) Records

• On receiving the consignment, no entry is made in books of account. The goods do not belong to the consignee but consignor. However, a memorandum record will be made by the consignee, showing all details of the goods received.

3. With cash from sales of consignment Dr. Cash/Debtors Cr. Consignor a/c

Entries to Record Consignments IN THE BOOKS OF CONSIGNEE – cont’d

2. Payments of consignment expensesDr. Consignor accountCr. Cash/bank account

4. Commission earnedDr. Consignor accountCr. Profit and loss account

5. Cash to settle balance shown on account of sale Dr. Consignor’s account Cr. Cash book

(The credit balance on consignor account represents amount due to the consignor)

Example

• Paul of Mwanza, whose financial year ends on 31 December, consigned goods to Anneth, his agent in Mombasa. All transactions were started and completed in 2013.

• (i) January 15: Paul consigned goods costing Shs 1,000,000

• (ii) February 27: Paul paid carriage to Mombas Shs 100000

• Anneth, the consignee, sends an account of sales on July 31 when all the goods have been sold. It shows: Sales amounted to 1,500,000. Anneth expenses were: import duty, Shs 50,000, distribution expenses, 60,000, Commission agreed at 6 percent on sales amounted 90000.

• Anneth paid balance owing 1,300,000

Paul’s Books

Consignment to Angel, Mombasa, Kenya2013

2013 Shs 2013 Shs

Jan15 Goods sent on cons 1,000 Jul31 Sales 1,500,

Feb28 Bank: carriage 100

Jul 31 Anneth:

Import duty 50

Distribution 60

Commission 90

Profit on consignment (transferred to P&L) 200

1500 1500

Goods sent on Consignment

2013

Jan 16 Consignment to Anneth 1000

Bank

2013 Shs 2013 Shs

Jul31 Angel (consignee) 1300

Feb28 Consignment to Angel: carriage 100

Angel (Consignee)

2013 Shs 2013 Shs

Jul31 Sales 1500 Jul31 Consignment

Import duty 50

Distribution 60

Commission 90

Bank 1300

1500 1500

Angel’s(Consignee) books

Account of Sales(converted in Tshs)

Angel,

Mombasa,

Kenya.

31 Jul 2013

To Paul

Mwanza

Sales of goods received on consignment 1,500

Less charges: Import duty 50

Distribution costs 30

Commission 90 200

Bank draft enclosed 1, 300

Paul (Consignor)

2013 Shs 2013 Shs

Jul31 Bank: Jul31 Bank:

Import duty 50 Sales 1500

Distribution 60

Commission transferred to P& L 90

Bank 1300

1500 1500

Bank

2013 Shs 2013 Shs

Jul31 Paul: Sales 1500 Jul31Paul: Import duty 50

Paul: Distribution 60

Paul: To settle account 1300

Profit and loss account (Anneth)

Shs

Commission on consignmentFrom Anneth 90

Valuation of unsold stock

• Unsold stock should be valued, taking into account all costs incurred by both the consignor and consignee in connection wit the consignment.

• The value of this unsold stock should be shown as a ‘carried down balance’ on the consignment account. ( an asset in the statement of financial position of the consignor)

• Value of unsold stock– Cost of the goods (valued @cost/market price whichever is lower)

– Add: Proportionate expenses of consignor – Add: Proportionate expenses of consignee (only nonrecurring

expenses of the consignee ie exclude recurring/fixed costs eg Godown rent, insurance, showroom expenses, selling expenses)

Illustration

• Paul consigns 100 radio to Anne. Each radio costs shs 800.

• Paul pays the following expenses: Freight 1000, Insurance 400, Carriage 500.

• Anne pays the following expenses: Custom duty 2,000, unloading charges 500, godown rent 500, salary to salesman 500.

• Goods reach the godown of consignee. • At the end of the year, 25 radio remained unsold with

Anne. The market value of each radio is 850.

• Your required to calculate value of closing stock.

Statement showing Value of Stock

Particulars Shs Shs

Cost of 25 radios@800 20,000

¼ Direct Expenses (i.e. 25/100)

Freight 250

Insurance 100

Carriage 125

Unloading Charges

Custom duty 500 1,100

21,100

 Loss Of Goods On Consignment

• Goods may be lost, destroyed or damaged either in transit or in consignee's store.

• Such loss can be divided into two parts:Normal LossAbnormal Loss

Normal Loss

• The loss is due to inherent characteristics of goods. E.g. shrinkage, evaporation, leakage and pilferage

• Such losses form part of cost of goods and no additional adjustment is required for this purpose

• Quantity of such loss is to be deducted from the total quantity sent by the consignor.

• Is included in the value of goods sold and closing stock by inflating the rate per unit

• Value of closing stock= (Total value of goods sent/Net quantity received by consignee) X unsold quantity

• Net quantity received = Goods consigned quantity - Normal loss quantity.

Illustration

• Angel consigned 2,000 tones of coal @ shs 50 per tone Boni.

• She paid shs 20,000 as freight. • Due to normal wastage only 1950 tones were

received by Boni. • Boni paid shs 500 as unloading and carriage

charges. • The goods unsold amount to 650 tones• Your required to calculate the value of unsold

stock

Solution

Shs

Cost price of 2000 tonnes of coal @ shs 50 per tone 100,000

Freight paid by consignor 20,000

Unloading and carriage charges paid by consignee 5,000

Total cost 125,00

Cost of 650 tones = 125,000 x 650= Shs 41,667

1950

Abnormal Loss

• Loss occurs on account of reasons which are accidental, or which rarely happened.

• They are like theft, riots, accidents, fire, earthquake etc

• Losses could occur in transit or in consignee's store and solely to be borne by consignor.

• The following method should be followed while valuing abnormal loss:A) Goods sent on consignment(at cost price) Shs XX

B) Add: Non-recurring expenses:

Consignor's expenses................ Shs XX

Consignee's expenses................ Shs XX

Total cost before abnormal loss A+B..............Shs XX

• Value of abnormal loss = (Total cost/Total units consigned) X abnormal loss units.

 

• If goods are not insured• For recording abnormal loss:

Abnormal loss A/C ...........Dr.

To consignment A/C……..Cr.

(With the value of abnormal loss)• For abnormal loss transferred:

Profit and loss A/C........Dr.

To abnormal loss A/C…Cr.

Abnormal Loss and Insurannce

• On payment of insurance premiun

Consignment a/c……………………………….Dr

To bank (or consignee if he paid the premium)

(With premium paid)• On happening of abnormal loss

Abnormal loss…………………………………..Dr

To consignment account• (With value of abnormal loss)

• On admission of claim of Insurance Company

Insurance Company a/c……………………DR

To abnormal loss account

(With amount of claim admitted)• On receipt of claim from insurance Company

Bank a/c……………………………………..DR

To Insurance Company

(With the amount received)

• The balance, if any, in the abnormal loss represents profit or loss which will be transferred to profit and loss account

• If Profit: Abnormal Loss Account…………DR

To Profit and Loss account• If Loss: Profit and Loss Account………….Dr

To Abnormal Loss Account