Consignment and joint venture – accounting aspects

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CONSIGNMENT AND JOINT VENTURE –
ACCOUNTING ASPECTS
by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – PGPSE / CSE PARTICIPANTS
mobile : 91+9414430763

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My words....
Here I present basic aspects of consignment and joint venture – accounting
aspects .
I wish that more people should become entrepreneurs. An ordinary Indian
entrepreneur wishes to remain an honest entrepreneur and contribute to the
development of nation,let us support entrepreneurs
..

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What is consignment ?
When a business person sends his goods to
someone else so that the other person can sell it
out. It is consignment. The first person remains
the owner, but the second person takes the
possession and sells out the goods on behalf of
the first person.

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Who is consignor / consignee?
Cosignor = the person who sends the goods.
He is the owner of the goods. He bears the
risks related to goods
Consignee = who receives the goods. He tries
to sell the goods on behalf of consignor

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What is the difference between
sale and consignment ?
In sale, there is transfer of ownership. But in
consignment, goods are sent, but ownership
remains with the consignor and the consignee
tries to sell the goods.
In case of sale, goods generally dont come
back. In consignment, unsold goods are taken
back by consignor.

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What is proforma invoice ?
It is prepared by consignor
it accompanies goods – when goods are sent to
consignee

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What is account sales ?
It is prepared by consignee.
It shows the sales undertaken by consignee

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What is the benefit to consignee ?
Consignee gets commission on goods sold.
Suppose rate of commission is 10%, and
consignee sells out goods of Rs. 4 lakhs. The
commission of consignee is Rs. 40000.
Consignor is bound to pay this commission

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What are consignment expenses ?
There are many expenses incurred in the
process of consignment. When goods are
despatched, there are carriage, freight,
insurance and other expenses. All the expenses
are borne by consignor .

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What is over-riding commission ?
Over-riding commission is allowed by the
consignor to the consignee to promote sale at
higher price than specified or to encourage
consignee to put more work in introducing new
product in the market.

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How to valuate stock ?
Stocks (inventory) have to be valued at cost.
Generally consignment is sent at invoice price.
But the stocks have to be shown at cost. So
when consignor is preparing final accounts,
adjustment has to be made from the stock to
arrive at cost price.

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Example : A sent goods of invoice price
1200 to B. Which are lying in godown of
B. What inventory will you show on
31/3/10? Invoice price is 20% above cost.
Here we have to prepare stock reserve account
to adjust for the profit element in stock.
20/120 * 1200 = 200
so 200 will be transferred to stock reserve
account. Thus inventory will be of (1200 –
200) = 1000 only in real terms (at cost).

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What accounts are prepared by
consignor ?
He prepares 2 accounts :
1. consignment to XYZ account
2. consignee account

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What accounts are prepared by
consignee ?
1. consignor account
2. conignment inward book

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What entries are made by
consignor while despatching
goods ?
consignment account Dr.
To Goods sent on consignment account

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What entries are made by
consignor when consignee sells
goods ?
Consignee a/c debit
to consignment a/c

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What entry is made by consignor
when expenses are incurred by
consignee ?
Consignment a/c debit
to consignee a/c credit

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What entry is made by consignor
when he himself incurs expenses ?
Consginment a/c debit
to bank a/c credit

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What are the contents of
consignment a/c ?
•DEBIT SIDE
•Opening stock
•All the expenses,
details of goods sent,
•Expenses incurred
by consignee
•Profit
•CREDIT SIDE
•Sales by consignee
•Stock (closing stock)

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What are the contents of
consignee account ?
•DEBIT SIDE
•Details of goods
sold by consignee
(consignment a/c )
•
•
•CREDIT SIDE
•All the expenses
•(consignment
account)
•Bank / cash
payments received
from consignee

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What accounting entry will be
made when consignee receives
goods from consignor ?
No accounting entry is required
the consignee is not the owner of the goods,
hence, no accounting entry is required.
However, there is a book maintained by
consignee, which shows the arrival of the
goods. This is called consignment inward
book.

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What accounting entry is required
when consignee sells the goods
(in the books of consignee) ?
Bank a/c Debit or Cash a/c debit
to consignor a/c credit

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What accounting entry is required
when consignee spends money on
behalf of consignor (in the books
of consignee) ?
Consignor a/c debit
to bank / to cash ac credit

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What accounting entry is required
for closing stock (in the books of
consignor) ?
Stock in consignment a/c debit
to consignment a/c credit

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What accounting entry is required
for closing stock (in the books of
consignee) ?
No entry is required (as these goods are the
property of consignor )

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Solve this question
Eekshwanku sent to Eklavya 1,000 pieces of goods on
consignment basis; one piece costing Rs. 230.
Eekshwanku sent Rs. 200 on packing, Rs. 400 on freight
and Rs. 1,000 on insurance in transit. Eklavya paid octroi
duty amounting to Rs. 1,200 and cartage Rs. 1,300 to
bring goods to his godowns. In course of time Eklavya
also spent Rs. 1,500 on insurance and rent of godown
and paid Rs. 4,000 as salaries to salesman. Just before
close of accounting period, Eklavya reported that he had
sold 800 pieces at Rs. 300 per piece. Eklavya is entitled
to a commission @ 5% of gross sales.

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Consignment account
•DEBIT
•To goods sent on
consignment 230000
•To bank 1600
•To consignee(expenses)
•8000
•To consignee (commission)
•1200
•Profit : 46020
•Total : 286,820
•
•CREDIT SIDE
•By consignee
240000
•By closing stock
•(see next slide for
valuation)
• = 46820
•Total: 286,820

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Consignee account
•DEBIT SIDE
•To consignment a/c
(sale) 240000
•CREDIT SIDE
•By consignment a/c
(expenses) 8000
•By consignment a/c
•(commission) 1200
•By balace / bank (if
he pays) (balancing
figure) 230800

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Calculation of closing stock
While calculating closing stock, we add all the
non-recurring expenses in the value of closing
stock
cost of stock 200*230 =46000
(200+400+1000+1200+1300)
4100 * 200/1000 =820
total cost =46820

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How to handle loss ?
•There are two types
of loss : 1 normal 2
abnormal loss
•we have separate
accounting for these

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How to adjust normal loss in
consignment ?
While calculating the value of stock on
consignment, the cost is inflated to cover the
normal loss.

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1,000 tonnes of limestone is consigned @20
per tonne, freight thereon being Rs. 4,000.
the quantity sold is 600 tonnes and that unsold
is 350 tonnes,there is a normal of loss 50
tonnes.
Here cost of closing stock will be inflated as
under :
(cost) * unsold goods / total goods for sale
=(20000+ 4000) * 350 / 950
= 8843 answer

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How to handle abnormal loss ?
There are two possibilities :
1. loss is insured
2. loss is not insured
if loss is insured, the insurance company will
pay the money. So create an abnormal loss
account and close it from the money received
from insurance company. If there is no
insurance, the entire loss must be transferred
to Profit and loss account

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What is joint venture ?
When two or more firms / individual join
together to work on a project, it is called joint
venture. It is not partnership, as it is just a
project on which they are working together.

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What is the difference between
joint venture and partnership ?
Partnership has a new firm, with new name,
new set up Partnership is lasting,. Partnership
enables firm to have a consolidated financial
system
Joint venture is temporary association and it
doesnt have a new firm

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What are the systems of
accounting in joint venture ?
There are 2 possibilities :
1. when separate books are maintained
2 when separate books are not maintained

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when separate books are
maintained
Each party in the joint venture must have
following accounts :
1. Joint Venture account
2. Joint venture party account (personal
account of the other party)

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Memorandum method
Here each party maintains following accounts :
1. Memorandum joint venture account
2. joint venture party account (personal
account of the other party)

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Example
On 1st January 2007 B and C entered into a joint venture
sharing the profits in the ratio of 3:2 after allowing a salary of
Rs. 2000 p.m. to C. B sent out of his stock of goods costing
Rs.5,00,000 to be sold by the latter and incurred expenses
amount to Rs. 10,700. On 3rd January, 2007, C accepted a bill
of exchange at 2 months for Rs. 3, 00,000 drawn by B. By 31st
March, 2007 C had sold goods for Rs. 6, 00,500 after incurring
expenses amounting to Rs. 11,450. C agreed to take over the
remaining goods for Rs. 20,000. C forwarded a cheque
immediately to settle the account. Show the Journal and
Ledger Account in the books of B and C.

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Joint venture accoung in the
books of B
•DEBIT SIDE
•To goods sent / Trading /
purchase 5 lakh
•To bank 10700
•To C 11450
•To C (salary) 6000
•To profit 92350
•(B= 55410)
•CREDIT SIDE
•By C (sale ) 600500
•By C 20000
•Total : 620500

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Joint venture party a/c C's personal account (in the
books of B )
•DEBIT SIDE
•Joint venture (Sale)
600500
•Joint venture (stock
taken over) 20000
•Total : 620500
•CREDIT SIDE
•By bill receivable 3 lakh
•By joint venture
(expenses+salary) 17450
•By profit (share) 36940
•Total : 354390
•Bank : 266110 (balancing
figure to be paid by C to B )

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When separate books of accounts
are maintained for joint venture ?
Here there are separate books of joint venture
account. These books are maintained in the
joint venture itself. Thus each party need not
maintain complete accounts.
Here we have following accounts :
1. joint venture account
2. joint bank account
3. personal account of the joint venture party

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Details of the accounts :
Joint Venture Account : just like Trading and Profit and
Loss Account for the venture showing purchase of goods,
expenses, sale of goods etc. Balance of this account will
show profit or loss of business and is distributed between
co-venturers.
Joint Bank Account : separate bank account opened in
the joint names showing receipts and payment of cash.
Personal Accounts of Co-venturers : It is the capital
accounts of the co-venturers showing, investment,
entitlements, receipts and drawing by the co-venturers.

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Example :
A and B entered into a joint venture to construct a building of
a new company. Profit and loss were to be shared in the ratio
of 3:2. A invested Rs. 2,00,000 and B Rs. 1,00,000. The
money was deposited to a joint bank account with
arrangement of overdraft of Rs. 2,00,000. A also supplied
materials valued Rs. 35,000 and B paid the architects fees of
Rs. 15,000. B also supplied a machine valued Rs. 25,000.
Building materials valued Rs. 4,00,000 and wages Rs.
1,00,000. They collected Rs 100000 from the joint venture.

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Joint venture account
•DEBIT
•To A 35000
•To B 15000
•To B 25000
•To bank material 400000
•To bank wages 100000
•To profit 425000
•CREDIT
•By sales 1000000
•

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Joint bank account
•Debit
•To A 200000
•To B 100000
•To sales 1000000
•Credit
•By joint venture
400000
•By joint venture
100000
•By a 490000
•By B 310000

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JOINT VENTURERS A/C A
•DEBIT
•To bank : 490000
•CREDIT
•By bank 200000
•By joint venture
35000
•By profit 255000

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JOINT VENTURERS A/C B
•To bank : 310000•Credit
•By bank 100000
•By joint venture
15000
•By joint venture
25000
•By profit 170000

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