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TOPIC 3: CONSIGNMENT | B/KEEPING FORM 4

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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
Preparation of the Accounts Sales
Prepare the Accounts sales
Activity 1
Prepare the Accounts sales
The Consignment Inward Account in the Book of the Consignee
Show the consignment Inward Account in the book of the Consignee
Activity 2
Show the consignment Inward Account in the book of the Consignee

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