Consignment Account

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 as inventory in 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 prearranged 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 system where one person sends the goods to another so that the latter can sell those goods on behalf of the person who sends it in the first place. Risk related to goods will be on the part of the consignor.

Parties in Consignment Account

There are two parties in a consignment.

1. The person sending the goods is the consignor
2. The person receiving the goods is the consignee

Valuation of Consignment

Valuation of stock will be done like a closing stock of a Trading concern and should be valued at the cost or the market price whichever is low. This stock will be valued at:

• Proportionate cost price and
• Proportionate direct expenses.

Here, proportionate direct expenses mean all expenses incurred by the consignor and the expenses of consignee, which are incurred by him till the goods reach the warehouse.

Invoicing Goods higher than Cost

Under this method, goods are charged at the cost + profit and the pro-forma invoice also shows this higher price of such goods. To know the actual profit, at the end of an accounting period, consignment account will be credited with excess price so charged. Value of the stock will also be adjusted to the extent of profit element. Main reason to adopt this policy by consignor is:

To hide actual profit from consignee.

Valuation of a stock at the consignor’s warehouse is comparatively easy in this case.

In this case, consignor usually directs consignee to sale goods on invoice price only. It prevents different sale price to different customers.

Loss of Goods

Normal Loss: Normal loss may occur due to inherent characteristics of goods like evaporation, drying up of goods, etc. It is not separately shown in the consignment account, but included in the cost of goods sold and the closing stock by inflating the rate per unit. To calculate the value of unsold stock, following formula is used.

Value of closing stock = [Total value of goods sent / Net quantity received by consignee] × Unsold quantity

Net quantity received = Goods consigned quantity – Normal loss quantity

Abnormal Loss:

An abnormal loss may occur due to any accidental reason. It is credited to the consignment account to calculate actual profitability. Valuation of closing stock is done on the same basis as explained earlier i.e. proportionate cost + proportionate direct expenses.

Abnormal Loss and Insurance

If, there is an insurance policy in respect of the consigned goods; following entries will be passed in the books of a consignor:

Summary of Accounting Entries

Following Accounting Entries (Except for Loss) will be done in the books of consignor and consignee for transactions related to the consignment: