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    BOOK KEEPING: FORM FOUR: Topic 3 – CONSIGNMENTS

    Msomi BoraBy 10 Mins Read

    TOPIC 3: CONSIGNMENTS

    Consignments
    The Account in the Consignors and Consignee’s Books
    Show the account in the consignors and consignee’s books
    Consignment Overview
    Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee), who undertakes to sell the goods. The consignor continues to own the goods until they are sold, so the goods appear asinventoryin the accounting records of the consignor, not the consignee.
    Consignment Accounting – Initial Transfer of Goods
    When the consignor sends goods to the consignee, there is no need to create an accounting entry related to the physical movement of goods. It is usually sufficient to record the change in location within the inventory record keeping system of the consignor. In addition, the consignor should consider the following maintenance activities:
    • Periodically send a statement to the consignee, stating the inventory that should be on the consignee’s premises. The consignee can use this statement to conduct a periodic reconciliation of the actual amount on hand to the consignor’s records.
    • Request from the consignee a statement of on-hand inventory at the end of each accounting period when the consignor is conducting a physical inventory count. The consignor incorporates this information into its inventory records to arrive at a fully valued ending inventory balance.
    • It may also be useful to occasionally conduct an audit of the inventory reported by the consignee.
    From the consignee’s perspective, there is no need to record the consigned inventory, since it is owned by the consignor. It may be useful to keep a separate record of all consigned inventory, for reconciliation and insurance purposes.
    Consignment Accounting – Sale of Goods by Consignee
    When the consignee eventually sells the consigned goods, it pays the consignor a pre-arranged sale amount. The consignor records this prearranged amount with a debit to cash and a credit to sales. It also purges the related amount of inventory from its records with a debit to cost of goods sold and a credit to inventory. A profit or loss on the sale transaction will arise from these two entries.
    Depending upon the arrangement with the consignee, the consignor may pay a commission to the consignee for making the sale. If so, this is a debit to commission expense and a credit to accounts payable.
    From the consignee’s perspective, a sale transaction triggers a payment to the consignor for the consigned goods that were sold. There will also be a sale transaction to record the sale of goods to the third party, which is a debit to cash or accounts receivable and a credit to sales.
    Consignment is a term used to refer to an arrangement whereby goods are sent by their owner (consignor) to an agent (consignee) who holds and sells the goods on behalf of the owner for a commission. It is important to understand that the agent never owns the goods.
    Distinction/Difference Between Consignment and Sale:
    The following are the main points of the difference between consignment and sale.
    Transfer of Legal Ownership of the Goods:
    In case of sale, the legal ownership 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 consignment but the ownership of the goods remains vested in the consignor till the goods consigned are sold by the consignee.
    Relationship Between Consignor and Consignee:
    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 agent. Because the consignee is to sell goods on behalf of the consignor.
    Expenses Incurred:
    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 a sale, expenses incurred after sale of goods are born by the purchaser.
    Risk Attached to the Goods:
    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 buyer of goods.
    Return of Goods:
    In case of consignment, return of goods is possible if 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.
    Requirement of Account Sale:
    In case of consignment, account sale is required to be submitted periodically by the consignee to the consignor. But in case of sales no account sale is required to be submitted by the purchaser to the seller.
    Problem 1 (Journal Entries and Ledger Accounts):
    Riaz Sugar Factory of Multan, consigned to Mr. Shahid of Lahore 400 bags of sugar at $25 per bag. They also paid cartage, freight, etc. $250. The consignor drew on consignee as an advance against the consignment at 3 months for $6,000 which they discounted at their bank at 5 percent. The consignee sold off the goods and rendered an account sales showing that the goods realized $12,000, out of which he deducted his charges amounting to $80 and his commission at 5 percent.
    Required: Make journal entries in respect of the above transactions in the books of consignor as well as the consignee
    Solution:
    Consignor’s Books
    JOURNAL ENTRIES
    Dr.Cr.
    $$
    Consignment to Lahore account10,000
    To Goods sent on consignment account10,000
    Consignment to Lahore account250
    To Bank account250
    Bills receivable account6,000
    To Shahid Ali6,000
    Bank account5,925
    Discount account75
    To Bills receivable account6,000
    Shahid Ali12,000
    To Consignment to Lahore account12,000
    Consignment to Lahore account680
    To Shahid Ali680
    Bank5320
    To Shahid Ali5320
    Consignment to Lahore account1,070
    To Profit and loss account1,070
    Goods sent on consignment account10,000
    To Trading account10,000
    LEDGER ACCOUNTS
    Consignment to Lahore Account
    $$
    Dr.Cr.
    To Goods sent on consignment10,000By Shahid Ali – Sales Proceeds12,000
    To Bank expenses250
    To Shahid Ali680
    To Profit and loss account1,070
    12,00012,000
    Goods Sent on Consignment Account
    $$
    Dr.Cr.
    To Trading account10,000By Consignment to Lahore10,000
    Bank Account
    Dr.Cr.
    $$
    To Bills receivable5,925By Consignment to Lahore250
    To Shahid Ali5,320
    Shahid Ali (Consignee)
    Dr.Cr.
    $$
    To Consignment to Lahore12,000By Bills receivable6,000
    By Consignment to Lahore680
    By Bank account5,320
    12,00012,000
    Bills receivable Account
    Dr.Cr.
    $$
    To Shahid Ali6,000By Bank5,925
    By Discount75
    6,0006,000
    Discount Account
    Dr.0Cr.0
    0$0$
    To Bills receivable75By Profit and loss account75
    Profit and Loss Account
    Dr.Cr.
    $$
    By Consignment to Lahore1,070
    Trading Account
    Dr.Cr.
    $$
    By Goods sent on consignment10,000
    Consignee’s Books
    JOURNAL ENTRIES
    Dr.Cr.
    $$
    Riaz sugar factory6,000
    To Bills payable account6,000
    Riaz sugar factory80
    To Bank account80
    Bank account12,000
    To Riaz sugar factory12,000
    Riaz sugar factory600
    To Commission account600
    Riaz sugar factory5,320
    To Bank account5,320
    Bills payable6,000
    To Bank account6,000
    LEDGER ACCOUNTS
    Riaz Sugar Factory (Consignor)
    Dr.Cr.
    $$
    To Bills payable12,000By Bank account12,000
    To Bank – expenses80
    To Commission600
    To Bank – Balance5,320
    12,00012,000
    Bank Account
    Dr.Cr.
    $$
    To Riaz sugar factory12,000By Riaz sugar factory80
    By Riaz sugar factory5,320
    By Bills payable6,000
    Commission Account
    Dr.Cr.
    $$
    To Profit and loss account600By Riaz sugar factory600
    Bills Payable Account
    Dr.Cr.
    $$
    To Bank6,000By Riaz sugar factory6,000
    Problem 2 – (Abnormal Loss):
    1,000 Motors were consigned by A & Co., of Lahore to Bashir of Karachi at an invoice cost of $150 each. A & Co., paid freight $10,000 and insurance $1,500. During transit 100 motors were completely destroyed. Bashir took delivery of the remaining motors and paid $14,400 as duty.
    Bashir sent a bank draft to A & Co., for $50,000 as an advance payment and later sent an account sale showing that 800 motors were sold at $220 each. Expenses incurred by Bashir on godown rent and advertisement etc., amounted to $2,000. Bashir is entitled to commission of 5 per cent.
    Required: Prepare consignment account and Bashir’s account in the books of A & Co., assuming that nothing has been recovered from the insurance company due to defect in the policy.
    Solution
    Consignment to Karachi Account
    $$
    To Goods sent on consignment1,50,000By sales (800 × 220)1,76,000
    To Bank – freight and insurance11,500By Profit and loss account – Ab. Loss*16,150
    To Bashir – duty14,400By Stock on consignment**17,750
    To Bashir – expenses2,000
    To Bashir – commission8,800
    To Profit and loss account23,200
    2,09,9002,09,900
    Bashir
    $$
    To Consignment account1,76,000By Bank50,000
    By Consignment account
    Duty14,400
    Expenses2,000
    16,400
    By Consignment account-commission8,800
    By Balance c/d1,00,800
    1,76,0001,76,000
    Working Note:
    (1)*Calculation of abnormal loss:
    100 motors at $150 each$15,000
    Add 100/1000 of freight and insurance (11,500 × 100/1000)1,150
    Abnormal loss16,150
    (2)**Calculation of Closing Stock:
    100 motors at $150 each$15,000
    Add 100/1000 of freight and insurance (11,500 × 100/1000)1,150
    100/900 of duty1,600
    Closing stock or unsold stock17,750
    Problem 3 (Invoicing Goods Higher Than Cost):
    Rashid of city A sends 100 sewing machines on consignment to Malik of city B. The cost of each machine is $130 but the invoice price is at the rate of $160 each. Rashid spends $400 on packing and despatch. Malik receives the consignment and immediately accepts Rashid’s draft for $8000. Subsequently, Malik informs Rashid that 80 machines have been sold at $175 each. Expenses paid by Malik are; freight $600, godown rent $50, and insurance $100. Malik is entitled to a commission of 6 per cent on sales and 1-1/2 percent as del credere commission.
    Give journal entries in the books of Rashid . Also prepare necessary ledger accounts:
    Solution:
    Journal
    Consignment to city B16,000
    To Goods sent on consignment account16,000
    (100 machines at $160 each sent on consignment)
    Consignment to city B400
    To Cash account400
    (Expenses incurred on consignment)
    Bills receivable account8,000
    To Malik8,000
    (Malik’s acceptance received)
    Malik14,000
    To Consignment to city B account14,000
    (80 machine’s sold Malik at $175 each)
    Consignment to city B account750
    To Malik750
    (Expenses incurred)
    Consignment to city B account1,050
    To Malik1,050
    (Commission at 6% plus 1-1/2 on sales)
    Consignment to city B account600
    To Stock reserve account600
    (Difference in closing stock adjusted)
    Stock on consignment account3,400
    To Consignment to city B account3,400
    (Value of 20 machines in the hands of Malik)
    Goods sent on consignment account3,000
    To Consignment to city B account3,000
    (The difference in the invoice value and cost, $30 per machine adjusted)
    Goods sent on consignment account13,000
    To Trading account13,000
    (Transfer of goods sent on consignment to trading account)
    Consignment to city B account1,600
    To Profit and loss account1,600
    (Transfer of profit on consignment)
    Consignment to City B Account
    $$
    To Goods sent on consignment16,000By Malik – Sales proceed14,000
    To Cash – Expenses400By Stock on consignment3,400
    To Malik – Expenses:By Goods sent on consignment3,000
    Freight600
    Rent50
    Insurance100
    750
    To Malik – Commission1,050
    To Consignment stock reserve600
    To Profit and loss account1,600
    20,40020,400
    Malik
    $$
    To Consignment to city B account14,000By Bills receivable account8,000
    By Consignment to city B account
    Expenses750
    Commission1,050
    By Balance c/d4,200
    14,00014,000
    The Transfer of the Consignee’s and Consignee’s Accounts to the Profit and Loss Account
    Show the transfer of the consignee’s and consignee’s accounts to the profit and Loss Account
    Profit and Loss Account
    Dr.Cr.
    $$
    By Consignment to Lahore1,070
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