Consignment Accounts By CA Prashanth Reddy

A. INTRODUCTION

When goods are sent by one person to another to be sold by the latter on behalf and at the risk of the former, the transaction is known as consignment.  The person who sends the goods to be sold on his behalf is called the consignor whereas the person to whom the goods are sent to be sold is called Consignee.  Consignment outward means that goods have been sent to some person on consignment basis while consignment inward implies that goods have been received to be sold on behalf of some other person on consignment basis.  The goods consigned to the agent cannot be treated as sales at the time of consignment, they are treated as sales only when these goods are sold by the consignee.

The legal relationship between Consignor and consignee is that of a principal and agent; consignor being the principal and consignee being the agent.  Hence, when the consignor sends goods, the title to the goods does not pass from consignor to the consignee and the consignee does not become liable to be for the goods so sent.

B. FEATURES OF CONSIGNMENT

The main features of Consignment re as under:

1. The relation between Consignor and Consignee is that of principal and agent.
2. Only the possession of goods and not the ownership of goods is transferred to the Consignee.
3. Risk of goods remains with the Consignor because ownership of goods remain with the Consignor.
4. Consignee is entitled to reimbursement of expenses incurred by him on behalf of the Consignor as per agreement.
5. Consignee is entitled to an agreed remuneration.
6. The profit/loss on sale of goods sent on Consignment belongs to the Consignor

C. CONCEPT OF CONSIGNMENT 

Pro-Forma Invoice: Along with the goods, a statement is usually forwarded by the consignor to the consignee, giving description of the goods consigned, the weight, quantity, price and other relevant details.  Such a statement is known as pro-forma invoice.  Pro-forma invoice is like ordinary invoice which is use at the time of normal buying and selling transactions.  Practically, it gives an idea to the consignee about the price at which the goods will be disposed of. 

Generally, pro-forma invoice, includes a certain minimum amount of profit beyond which the consignee is not allowed to sell. Therefore, pro-forma invoice price is always higher than the actual cost price.  Therefore, an adjustment is to be made at the end o the period in order to ascertain the correct amount of profit.

Accounts Sales: An Account Sales is a statement sent by the consignee to the consignor periodically.  It contains the information like (a) Sale made; (b) Expenses incurred on behalf of Consignor; (c) Commission earned; (d) An Advance (if any) given; (e) the balance due to the principal.  An Account Sales is different from Sales Account (with provides only the summary of sales made).

Commission: Commission is the remuneration paid to the consignee by the consignor in consideration of the services rendered by the former in selling the goods consigned.  This commission can be divided into 2 types (a) Ordinary Commission, and (2) Special Commission.

1. Ordinary Commission: It is a commission usually paid as a fixed percentage on gross sale proceeds. The term commission normally denotes ordinary commission, unless specified otherwise.   The consignee is not responsible for any bad debts and he does not guarantee the payment from all those who buy on credit so long as he is getting ordinary commission only.
2. Special Commission: This is the commission which the consignee gets over and above the ordinary commission. It can be sub-divided into 2 categories.
3. Over-riding Commission: This is an extra commission allowed over and above the normal commission and is generally offered when the agent is required to put in hard work either in introducing a new product in the market or where he is entrust with the work of supervising the performance of other agents in a particular area. This commission is also given for sales at prices higher than the price fixed by the consignor.

Depending upon the terms of agreement it may be calculated on the actual total sales or on the difference between Actual total sales and Sales at special selling price or invoice price.  However, in the absence of any such agreement, over-riding commission should be allowed on the difference between the actual total sales and sales at specified selling price and ordinary commission should be allowed on total sales at specified sales price.

1. Del-Credere Commission: This s an additional commission paid by the consignor to the consignee for bearing the loss on account of bad debts, if any, arising out of credit sale of consignment goods. Such commission may be allowed on credit sales or total sales.

However, in the absence of any such agreement, the consignor allows such commission on total sales and not merely on credit sales.  In case of a dispute regarding the delivery or quality etc, if a customer has deducted a particular amount, the consignee will not bear this loss even if he is getting a del-credere commission.

ADVANCE:  Advance is a common trade practice for the consignor to demand some advance from the consignee as a security for the goods dispatched to him.  It may be in the form of cash or bank drat or in the or5m of a bill of exchange.  The consignee will send some amount as an advance before or after he receives the goods from the consignor.  The advance received from the consignee should not be credited to consignment account as it is not a part of the sale proceeds.  The advance will be adjusted against the amount due from the consignee when the accounts are finally settled.  In some cases, a bill may be drawn on the consignee is he is not in a position to pay advance money.  The consignor can discount the bill with his bankers.  In such a case the value of the bill (as advance) so accepted will be deducted from the sale proceeds.  The discount paid to the bank should be charged to the P & L account as it represents cost of raising finance.

The worth noting point here is that while calculating the amount due from the Consignee, the proportionate advance pertaining to unsold goods should not be adjusted.  Such proportionate advance should appear as a credit balance in Consignee’s Account in the books of Consignor.