BOOK KEEPING: FORM FOUR: Topic 3 - CONSIGNMENTS

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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 account	10,000
To Goods sent on consignment account		10,000
Consignment to Lahore account	250
To Bank account		250
Bills receivable account	6,000
To Shahid Ali		6,000
Bank account	5,925
Discount account	75
To Bills receivable account		6,000
Shahid Ali	12,000
To Consignment to Lahore account		12,000
Consignment to Lahore account	680
To Shahid Ali		680
Bank	5320
To Shahid Ali		5320
Consignment to Lahore account	1,070
To Profit and loss account		1,070
Goods sent on consignment account	10,000
To Trading account		10,000

LEDGER ACCOUNTS

Consignment to Lahore Account

	$		$
Dr.		Cr.
To Goods sent on consignment	10,000	By Shahid Ali - Sales Proceeds	12,000
To Bank expenses	250
To Shahid Ali	680
To Profit and loss account	1,070
	12,000		12,000

Goods Sent on Consignment Account

	$		$
Dr.		Cr.
To Trading account	10,000	By Consignment to Lahore	10,000

Bank Account

Dr.		Cr.
	$		$
To Bills receivable	5,925	By Consignment to Lahore	250
To Shahid Ali	5,320

Shahid Ali (Consignee)

Dr.		Cr.
	$		$
To Consignment to Lahore	12,000	By Bills receivable	6,000
		By Consignment to Lahore	680
		By Bank account	5,320
	12,000		12,000

Bills receivable Account

Dr.		Cr.
	$		$
To Shahid Ali	6,000	By Bank	5,925
		By Discount	75
	6,000		6,000

Discount Account

Dr.	0	Cr.	0
0	$	0	$
To Bills receivable	75	By Profit and loss account	75

Profit and Loss Account

Dr.		Cr.
	$		$
		By Consignment to Lahore	1,070

Trading Account

Dr.		Cr.
	$		$
		By Goods sent on consignment	10,000

Consignee's Books

JOURNAL ENTRIES

	Dr.	Cr.
	$	$
Riaz sugar factory	6,000
To Bills payable account		6,000
Riaz sugar factory	80
To Bank account		80
Bank account	12,000
To Riaz sugar factory		12,000
Riaz sugar factory	600
To Commission account		600
Riaz sugar factory	5,320
To Bank account		5,320
Bills payable	6,000
To Bank account		6,000

LEDGER ACCOUNTS

Riaz Sugar Factory (Consignor)

Dr.		Cr.
	$		$
To Bills payable	12,000	By Bank account	12,000
To Bank - expenses	80
To Commission	600
To Bank - Balance	5,320
	12,000		12,000

Bank Account

Dr.		Cr.
	$		$
To Riaz sugar factory	12,000	By Riaz sugar factory	80
		By Riaz sugar factory	5,320
		By Bills payable	6,000

Commission Account

Dr.		Cr.
	$		$
To Profit and loss account	600	By Riaz sugar factory	600

Bills Payable Account

Dr.		Cr.
	$		$
To Bank	6,000	By Riaz sugar factory	6,000

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 consignment	1,50,000	By sales (800 × 220)	1,76,000
To Bank - freight and insurance	11,500	By Profit and loss account - Ab. Loss*	16,150
To Bashir - duty	14,400	By Stock on consignment**	17,750
To Bashir - expenses	2,000
To Bashir - commission	8,800
To Profit and loss account	23,200
	2,09,900		2,09,900

Bashir

	$			$
To Consignment account	1,76,000	By Bank		50,000
		By Consignment account
		Duty	14,400
		Expenses	2,000
			16,400
		By Consignment account-commission		8,800
		By Balance c/d		1,00,800

	1,76,000			1,76,000

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 loss	16,150
(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 duty	1,600
	Closing stock or unsold stock	17,750

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 B	16,000
To Goods sent on consignment account		16,000
(100 machines at $160 each sent on consignment)
Consignment to city B	400
To Cash account		400
(Expenses incurred on consignment)
Bills receivable account	8,000
To Malik		8,000
(Malik's acceptance received)
Malik	14,000
To Consignment to city B account		14,000
(80 machine's sold Malik at $175 each)
Consignment to city B account	750
To Malik		750
(Expenses incurred)
Consignment to city B account	1,050
To Malik		1,050
(Commission at 6% plus 1-1/2 on sales)
Consignment to city B account	600
To Stock reserve account		600
(Difference in closing stock adjusted)
Stock on consignment account	3,400
To Consignment to city B account		3,400
(Value of 20 machines in the hands of Malik)
Goods sent on consignment account	3,000
To Consignment to city B account		3,000
(The difference in the invoice value and cost, $30 per machine adjusted)
Goods sent on consignment account	13,000
To Trading account		13,000
(Transfer of goods sent on consignment to trading account)
Consignment to city B account	1,600
To Profit and loss account		1,600
(Transfer of profit on consignment)

Consignment to City B Account

		$		$
To Goods sent on consignment		16,000	By Malik - Sales proceed	14,000
To Cash - Expenses		400	By Stock on consignment	3,400
To Malik - Expenses:			By Goods sent on consignment	3,000
Freight	600
Rent	50
Insurance	100
		750
To Malik - Commission		1,050
To Consignment stock reserve		600
To Profit and loss account		1,600
		20,400		20,400

Malik

	$		$
To Consignment to city B account	14,000	By Bills receivable account	8,000
		By Consignment to city B account
		Expenses	750
		Commission	1,050
		By Balance c/d	4,200
	14,000		14,000

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 Lahore	1,070