Accounting for consignments

ACCOUNTING

1. ACCOUNTING FOR CONSIGNMENTS
ACC 123

2. 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.

3. 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

4. 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

5. 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

6. 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

7. •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.

8. •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

9. Consignor’s(the trader’s)
Records
•Consignor usually maintains three
accounts:
Consignment Account
Consignee Account
Goods sent on Consignment account

10. •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

11. 1.On sending goods to consignee
•With the cost of the goods
Dr. Consignment account
Cr. Goods sent to on Consignment
account (stock a/c)
2.Expenses paid or incurred in connection
with the consignment
Dr. Consignment account
Cr. Cash/bank

12. 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 account
Cr. Consignment account
4. With the expenses incurred by the consignee
Dr. Consignment account
Cr. Consignee’s account
5. With commission of consignee
Dr. Consignment account
Cr. Consignee’s account

13. 6. With the money received from consignee
Dr. Cash/Bank
Cr. Consignee’s account

14. •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.

15. 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

16. Entries to Record Consignments IN THE
BOOKS OF CONSIGNEE – cont’d
2. Payments of consignment expenses
Dr. Consignor account
Cr. Cash/bank account
4. Commission earned
Dr. Consignor account
Cr. 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)

17. 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

18. •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

19. Paul’s Books
Consignment to Angel, Mombasa, Kenya2013
2013 Shs 2013 Shs
Jan15Goods sent on cons 1,000Jul31Sales 1,500,
Feb28Bank: carriage 100
Jul 31Anneth:
Import duty 50
Distribution 60
Commission 90
Profit on consignment
(transferred to P&L) 200
1500 1500

20. Goods sent on Consignment
2013
Jan 16 Consignment to Anneth1000

21. Bank
2013 Shs2013 Shs
Jul31Angel
(consignee)1300
Feb28Consignment to
Angel: carriage100

22. Angel (Consignee)
2013 Shs2013 Shs
Jul31Sales1500Jul31Consignment
Import duty 50
Distribution 60
Commission 90
Bank 1300
1500 1500

23. 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

24. Paul (Consignor)
2013 Shs2013 Shs
Jul31Bank: Jul31Bank:
Import duty 50 Sales1500
Distribution 60
Commission
transferred to
P& L 90
Bank 1300
1500 1500

25. Bank
2013 Shs2013 Shs
Jul31Paul: Sales 1500Jul31Paul: Import duty 50
Paul: Distribution 60
Paul: To settle account1300

26. Profit and loss account (Anneth)
Shs
Commission on consignment
From Anneth
90

27. 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)

28. 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.

29. 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

30. 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 Loss
Abnormal Loss

31. 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.

32. •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.

33. 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

34. Solution
Shs
Cost price of 2000 tonnes of coal @ shs 50 per tone100,000
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

35. 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.

36. •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.

37. •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.

38. 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)

39. •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)

40. •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