what is Accounting for consignments?

Accounting for consignments

Concept:

In today's word of business, every, manufactured of exporter or wholesaler tries his best to sell his products within the country and abroad to a large extent. For this, that manufacturer or wholesaler appoints local agents in different agrees and sends goods to them for sale on commission basis on behalf and risk of the firmer. When goods are sent by one producer/wholesaler or business firm of one area to another business firm(Agent) of another area for the purpose of warehousing or storing and intimate sale on commission basis at the sole risk of the sender his self, then it is called 'goods sent on consignment or simply "consignment". In other words, consignment is an act on sending the goods by the owner (manufacturer or wholesaler) to his agent, who agrees to collect, store and sell them on the risk and behalf of the owner on commission basis. Here, the owner sending the goods for sale is called the 'consignor or principal' and the person or firm receiving the goods is called the 'consignee or agent'. For example, when Mr. A of Lahan appoints Mr. B Kathmandu as an agent and Delivers goods to him for sale on commission basis, then it is called 'consignment'. Here, Mr. A is Lahan is a consignor or principal and Mr. B of Kathmandu is a consignee or an agent.

The relationship between consignor and consignee is that of 'principal and agent' and not that of seller and buyer. Consignee is liable to make the payment to the consignor only o the extent the goods he has sold unsold goods belong to the consignor and are held by the consignee at the risk of the consignor.

Thus, the term 'consignment' implies dispatching or delivering of goods to an agent i.e., merchant in another place within the same country or foreign country for sale of such goods on commission basis.

Important items

1.      Pro-forma invoice

It is a statement sent by the consignor to the consignee along with the goods containing the details of goods consigned. It gives the particulars as to the nature of the goods, its quantity or weight of measurement, quality, price, packing and details of any expenses only for information. It is substitute for invoice but it is drawn up in the form of an invoice and termed as 'pro-form invoice'

1.      Expenses on consignment

When the goods are sent on consignment, certain expenses have to be incurred by the consignor as well as consignee. These expenses are of two types namely:

a.      Non-recurring expenses and

b.      Recurring expenses

Non-recurring expenses: all those direct expenses which are made to bring the goods to the place of consignee. These are expenses which are incurred to bring the goods at his go down or warehouse of the consignee and increase the cost price of the goods. a relevant proportion of these expense have to b take into account while valuing the consignment stock and abnormal loss. These expenses include:

• ·                 Packing charges
• Transport or carriage or freight or forwarding charges
• Loading charges
• Landing or unloading charges
• Dock charges
• Custom or export or import duty
• Octroi charges
• Insurance premium in transit.

a.      Recurring expenses: all those expenses, which are incurred after the goods have reached the place of the consignee, are called recurring. These are indirect expenses and generally include the fooling expenses:

·        Bank charges

·        Expenses on damaged goods

·        Commission

·        Brokerage

·        Go down rent and storage charge

·        Insurance on go down

·        Publicity and advertising

·        Salesmen's salaries

·        Carriage on sales

·        Other selling and distribution expenses

·        Expenses on goods return or goods damage

·        Establishment expenses

1.      Advance (or deposit) on consignment

The consignor may require the consignee to deposit with him a certain sum of money as an advance against the consignment. It is only a security for the goods consigned. It will appear as a liability in the consignor's books.

1.      Commission

Remuneration payable to the consignee for his services is teamed as commission which is generally a fixed percentage of gross sale proceeds unless otherwise stated.

a.      Normal commission: it is the remuneration of the consignee relating to services performed in connection with the selling of the goods on behalf of the consignor. This commission is generally based on the total amount of the amount of the sales made by the consignee thus it will increase with the increase in sale.

b.     Del-credere commission: the consignee may also sell the goods on credit and in such a case; a credit purchase becomes a debtor of the consignor and not of the consignee. This is for the simple reason that the consignee sells goods an agent of the consignor. In this situation, the consignor agrees to pay an extra commission to consignee to prevent any loss by bad debt and for guaranteeing the payment of debts by debts by debtors. This extra commission s known and del credere commission. In other words, the from the purchaser. In this situation, the consignees whether he  to bear the loss debt becomes bad or irrecoverable. In simple words, deb-credere commission is allowed to the consignee when the he agrees to bear the risk of bad debts on account of credit sales made by him.

Del-credere commission is generally calculated on the total sales if there are no instructions in the question.

a.      Over-riding commission: it is a type of commission, which is allowed to the consignee in addition for the normal commission. This commission is provided as an additional incentive to the to encourage his so that he sells thee the goods at a higher prices this commission is generally offered to consignee will depend upon the agreement in this regard.

The calculation of over-riding commission is based on the terms of agreement between the consignor and the consignee. It may be calculated on total or on the excess of the total sales price over invoice price or minimum specified price of the goods sold.

1.      Account sales

It is a report or a statement prepared by consignee and sent to the consignor, periodically, giving details of the goods sold, amount received, expenses paid by the consignee on behalf of the consignor, consignee's commission and the net balance for which consignee is liable. On the basis of account sales, the consignor gets certain information regarding the gross sale processed, expenses paid by the consignee, his commission and net balance due from his. All this information is them recorded in the books of the consignor.

Accounting for consignment Transaction in the books for consignor

A consignor often dispatches goods to more than one consignee at different places. The consignor would, therefore, be interested to ascertain the profit or loss in respect of each consignment. He maintains a separate consignment account for goods sent to each consignee. Generally, the following journal entries are made in the books of consignor:

     Accounting for consignment transaction in the books of Consignee

   Consignee sells goods sent by consignor and receives commission on such sales. He also maintains books of accounts to record goods received form consignor, sales of such goods, expenses incurred, commission received, advance payment and final to get net balance due to consignor. Generally, the following journal entries are made in the books of consignee:

     Value of Unsold stock

    This is the with consignee which remained unsold at the end of accounting period. It is also known as consignment stock. The consignment stock is valued at the cost or market price whichever less is. The method of valuation of unsold stock or consignment stock based on cost price is as follows:

1.      The original cost of the goods to the consignor: the price at which the goods have been bought or manufactured by him.

2.      Then after, add: the element proportion of direct or non-recurring expense incurred by the consignor in placing the goods in a salable condition i.e. packing charges, cartage, insurance-in- transit, and handling-in-transit, freighted.

3.      Add further, the relevant proportion of the expenses (i.e. non-recurring expenses) incurred by the consignee before the goods have been received at the place of consignee.

    It is thus very clear that the selling expense and expense incurred on storage such as godown rent, insurance, advertisement, salesman's commission or broker's fee (i.e. recurring expense) are not to be included in valuing the consignment stock.

    Notes: when the details regarding the nature of expenses is not given in a problem, it is suggested that a relevant proportion of expenses incurred by the consignor only should be taken into account for valuing the i=unsold stock. In this situation, expenses incurred by the consignee are ignored.

   Loss of goods on consignment

    Sometimes goods sent on consignment may be lost or damaged due to some reasons. Such loss of goods on consignment should be borne by consignor not by consignee and can be divided into two parts:

1.      Normal loss

2.      Abnormal loss

      Normal Loss: loss of goods in the normal course of business and inherent in the nature of the sent on consignment is known as normal loss. Such loss arises due to such reasons as the loading and unloading, cutting the bulk material in to smaller parts, evaporation, drying, sublimation, etc, it is a unavoidable loss and a part of the cost of the consignment, therefore, consignor does not make a separate entry of such loss. However, such loss is considered while valuing the unsold consignment stock in the hands of the consignee. If there is normal loss, unsold consignments stock is valued as under:

    Abnormal loss: it is a type of loss which is unexpected and unavoidable i.e., beyond the control of businessman. It arises due to abnormal factors or circumstances such as fire, theft, pilfering inefficiency (abnormal breakage due to negligence) sabotage, earthquake, flood, etc. the valuation of abnormal loss is made in the same manner as the valuation of unsold stock on consignment. In other words, the calculation of abnormal loss is done by calculation the original cost of the goods lost and the proportionate non-recurring expense incurred by the consignor be ignored. Total abnormal loss should be credited to the consignment account. Generally, the following journal entries are made in the following situation of abnormal loss:

     Consignment goods sent at invoice Price

   When goods are consigned at a price higher than the cost price, then it is called "goods sent on consignment at invoice price". This is the minimum price at which the consignee should sell the goods. The intention behind pricing the goods at invoice price is to discourage the consignee form resorting to dishonest practices. The real price of the goods is not disclosed to consignee comes to know the real value of the goods; he may sell his own product at a price lower than the suggested by the consignor for his products. Similarly, he may actually sell the goods of the consignor at the market or suggested price but may report to the consignor lower rate than the price actually received.

     This due to these reasons, consignor invoice the goods at a price higher that their cost. Such a price is also known as 'loaded price or selling price'

    The according treatment of consignment transactions at invoice price is exactly the same as started earlier in the previous case  of cost price except with regard to (a) consignment stock at the beginning and at the end (b) goods sent on consignment (c) goods returned by the consignee. The load on this trisection must be adjusted or eliminated by the following additional journal entries:

        Consignment goods taken over by consignee

    Sometimes, a consignee of an agent keeps goods sent on consignment for personal use. In this situation, consignor keeps record of such transaction assuming a sale. Similarly, consignee or agent records such transaction assuming a purchase.

     The following entries are made in the books of consignor and consignee.

      Interest on consignment

      The amount invested on consignment can earn interest if such amount is invested in other investment areas. It means consignor is losing interest on it. Actually, such amount of interest is opportunity cost; therefore, it should be recorded as financial expenditure. In the situation, to find out the amount of real net profit or loss, the following entry is made to record such interest in consignment.

      Review of Theoretical Concept

      Write the meaning of consignment.

     In today's world of business, every manufacturer or exporter or wholesaler tries his best to sell his product within the country and abroad to a larger extent. For this, that manufactures or wholesaler appoints local agent s in different areas and sends goods to them for sale on commission basis on behalf and risk of the former. When goods are sent by one producer/wholesaler or business firm of one area to another business firm (agent) of another area for the purpose of warehousing or storing and ultimate sale on commission basis at the sole risk of the sender himself, then it is called 'goods sent of consignment' or simply 'consignment'.

     Differentiate between consignment and sales.

    The different between consignments and sales and explained in the following table:

    Write about different types of commission provides to consignee.

      Remuneration payable to the consignee for his services is termed as commission which is generally a fixed percentage of gross sale proceeds unless otherwise stated.

a.      Normal commission: it is the remuneration of the consignee relating to services performed in connection with the selling of the goods on behalf of the consignor. This commission is generally based on the total amount of the amount of the sales made by the consignee thus it will increase with the increase in sale.

b.     Del-credere commission: the consignee may also sell the goods on credit and in such a case; a credit purchase becomes a debtor of the consignor and not of the consignee. This is for the simple reason that the consignee sells goods an agent of the consignor. In this situation, the consignor agrees to pay an extra commission to consignee to prevent any loss by bad debt and for guaranteeing the payment of debts by debts by debtors. This extra commission s known and del credere commission. In other words, the from the purchaser. In this situation, the consignees whether he to bear the loss debt becomes bad or irrecoverable. In simple words, deb-credere commission is allowed to the consignee when the he agrees to bear the risk of bad debts on account of credit sales made by him.

    Del-credere commission is generally calculated on the total sales if there are no instructions in the question.

c.      Over-riding commission: it is a type of commission, which is allowed to the consignee in addition for the normal commission. This commission is provided as an additional incentive to the to encourage his so that he sells thee the goods at a higher prices this commission is generally offered to consignee will depend upon the agreement in this regard.

    What are recurring and non-recurring expenses? Give some example:

     Non-Recurring expenses: all those direct experiences which are made to bring the goods to the place of consignee. These are those expenses which are incurred to bring the goods at the go-down or warehouse of the consignee and increase te cost price of the goods. A relevant proportion of these expenses have to be taken into account while valuing the consignment stock and abnormal loss. These expenses include: packing charge, transport or carriage or freight or forwarding charge, loading charges, landing or unloading charges, dock charge, custom or export or import duty, octopi charge, insurance premium in transit, etc.

     Recurring expenses: all those expenses, which are incurred after the goods have recurring expense. These are indirect expenses and generally include the following expense: bank charges, expenses on damaged goods, commission, brokerage, go down, publicity and advertising, salesman's salaries, carriage on sale, other selling and distribution expense on goods return or goods damage, establishment expense, etc.