Consignment Accounts

Need and Meaning of Consignment: In an ever growing market for almost every
product, it is becoming very difficult for the manufacturer or the wholeseller to
establish a direct link with the ultimate consumers of his products because of large
distance, high cost of marketing through own selling outlets (e.g., branches) and
ignorance of local conditions. Under these circumstances consignment is a popular
way of creating new markets for a product and distributing goods in national and
international markets. This type of dispatch of goods by one person from one place to
another person at another place is known as the consignment. The word consignment
can be generally defined as the act of sending of goods by one merchant to another
merchant at a different place for the purpose of warehousing and ultimate sale on
commission basis at the sole risk of the sender himself. Goods sent are known as
Consignment. The sender of the goods is called the Consignor. Generally forwarded
for the purpose of sale is known as the Consignee. The consignment can be classified
as:
(1) Outward Consignment: It is called outward when the dispatch of quantity of goods
from one country to another is made for the purpose of sale.
(2) Inward Consignment: It is called inward when the receipt of the quantity of goods
is made for the purpose of sale.
Goods sent on consignment do not become the property of the consignee. He has not
bought them. The ownership remains with the sender o the consignor. If the goods are
destroyed, the receiver (consignee) is nor at all responsible. The loss will fall on the
consignor. The consignee tries to sell the goods according to the instructions of the
consignor. When the goods have been sold, he will deduct his expenses, commission
etc., from the sale proceeds and the balance is remitted to the consignor. The
relationship between the consignor and the consignee is that of principal and agent.
The consignee is the agent. The consignee acts entirely on behalf of the consignor.
The consignee is entitled to his remuneration which is generally fixed on the basis of a
commission on sales. The expenses incurred by the consignee must also be
reimbursed by the principal. The student must remember that the consignee does not
buy the goods; he merely receives the possession of goods. Therefore, such goods
require special treatment in accounts.
The main features of consignment transaction can now, therefore, be put as under:
(1) Consignment of goods is not sale. It is mere transfer of possession of goods.
(2) The consignee sells goods at the risk of consignor. He is nor responsible for any
loss.
(3) The sale proceeds belong to the consignor and the consignee merely gets
commission and expenses the he might have incurred.
(4) The relationship between consignor and consignee is that of a principal and an
agent.
Distinction between a Consignment and a Sale. The following are the main points
of difference between a consignment and a sale:
(1) In case of a sale, the legal relationship of the goods sold is transferred to the
purchaser of goods; whereas in case of a consignment of goods, the legal ownership
of the goods is not transferred to the consignee but the ownership of the goods
remains vested in the consignor till the goods consigned are sold by the consignee.
(2) In case of a sale of goods, the relationship between the seller and the purchaser of
the goods is that of a creditor and a debtor whereas in case of a consignment the
relationship between the consignor and the consignee is that of a principal and an
agent because the consignee is to sell goods on behalf of the consignor.
(3) In consignment, expenses incurred by the consignee in connection with the goods
consigned to him are usually borne by the consignor whereas in case of sale,
expenses incurred after sale of goods are borne by the purchaser.
(4) In case of consignment, risk attached to the goods sold lies with the consignor till
the goods consigned are sold by the consignee. But in case of a sale. Risk attached
to the goods sold is transferred to the purchases of goods.
(5) In case of consignment, return of goods is possible, it the goods are not sold by the
consignee. But in case of sale return of goods is not possible as goods once sold are
not returnable.
(6) In case of consignment, account sales are required to be submitted periodically by
the consignee to the cosigner. But in case of sale no account sale is required to be
submitted by the purchaser to the seller.
Important Terms:
Commission: The term commission as used in connection with consignment denotes
the remuneration of the consignee for selling the goods of the consignor. This can be
simple del-credere and over-riding.
(1) Simple commission is calculated as per terms laid down by the consignor usually
this is a fixed percentage on total sales.
(2) Del-Credere Commission is an extra commission allowed to the consignee of his
guaranteeing the realization of the debts in full, in connection with the credit sale of
goods on consignment. Goods may be sold by the consignee either for cash or on
credit. When they are sold on credit the consignee may guarantee that they will be
duly paid for and that he will be liable to indemnify the consignor for all bad debts in
such cases the consign or pays the consignee an extra commission for the guarantee.
This extra commission is called Del-Credere Commission.
(3) Over-riding Commission in order to give further incentive sometimes an extra
commission termed as over-riding commission is allowed to consignee, in case the
sales exceed a specified amount it is also calculated on total sales.
Advance against Consignments. The cosigner may ask the consignee to deposit
some money with him to be dept by him as security in respect of the goods sent by
him on consignment. Usually the consignee is asked to accept a bill of exchange.
Usually the consignee is asked to accept a bill of exchange to cover part of the value
of the good. This is a guarantee by the consignee that when sales are affected he will
make the necessary payment of cause instead of a bill of exchange; the agent may
remit a sum of money to the principal as an advance. This advance or the amount of
the bill of exchange will be adjusted when the goods are sold.
Discounting Charges: Sometimes it becomes difficult to decide whether the discount
charged by the banker upon cashing the bill of exchange is an ordinary expense or a
special expense relating to consignment. It is treated as an ordinary expense and,
therefore, it is charged to profit and loss account. But if it is regarded as an expense on
consignment it should be debited to the particular consignment account. Strictly
speaking, the discount is a result of the consignor’s general financial operation and is
nor consignment expense. It is therefore, suggested that ‘discount’ should be treated as
a part of bank charges and transferred to profit and loss account.
Expenses of Consignment: There are two types of expenses (a) Recurring (b) Non-
recurring expenses. Non-recurring expenses are those expenses which are incurred to
bring the goods ar the godown or warehouse of the consignee. Non-recurring expenses
are also called direct expenses. All other expenses are called recurring expenses and
generally include expenses incurred on selling the product.
Proforma Invoice: It is statement prepared by the consignor stating quantity, quality
and price of goods. It is sent with goods dispatched to consignee. A proforma invoice
is different from invoice. Invoice implies that a sale has taken place. It is statement
describing the goods dispatched to the buyer and showing the total amount due by him
to the seller. A proforma invoice is simply a statement of information in the form of
invoice to apprise the party, who has not bought the goods but shall be having their
possession or dealing with them, of certain essential particulars of the goods. Such as
invoice is sent by the intending seller to his agent or the intending buyer before the
sale actually takes place. It does not show that the person to whom it is sent is in
debited to the sender.
Account Sales: An “Account Sales” is a statement prepared and sent by the consignee
to the consignor, at periodical intervals, dealing therein the goods sold, price realized,
expenses incurred by, commission payable to and the net amount due from the
consignee.