Accounting For Special Transactions Unit 1 Consignment

Meaning Consignment Account deals with a situation where one person sends goods to another person on the basis that goods will be sold on behalf of and at the risk of the former. Points to be noted Principal - The party which sends the goods is called Consignor or Principal. Agent- The party to whom goods are sent is called consignee or agent. Ownership of the property- ownership of the goods remains with the consignor; consignee does not become the owner even though they are in his possession Proforma Invoice- Principal does not send an invoice to the agent. He sends only a proforma invoice which is like an invoice but not really one. It provides information regarding particulars of the goods sent. Expenses- The agent recovers from the principal all expenses incurred by him on the consignment. This can be changed by agreement between two parties. Advance to Principal- Agent usually gave an advance to principal in the form of bill of exchange or cash. It is adjusted against the sale proceeds of the goods. Commission- agent receives commission for the work. Commission is calculated on the basis of gross sale. Ordinary Commission- here agent is not responsible for any bad debt that may arise Del-credere Commission here agent is responsible for bad debts. It is calculated on total sales, not merely on credit sales until and unless agreed e.g. Cash sales =50000, credit sales=50,000 del-credere 2%calculate Del credere commission Solution Total sales=

cash sales + credit sales 50,000 + 50,000=100,000

Explanation Here commission is charged on Total Sales because question is silent herein case question specifically says del-credere commission to be charged on credit sales then commission =1000 i.e. 2% on 50,000. Accounts Sales-Periodically the agent sends to the principle a statement called Account Sales. It sets out the sales made by the agent, the expenses incurred on behalf of the principal, the commission earned by the agent and the balance due to principal Ascertainment of profit or loss firm usually likes to ascertain the profit or loss on each consignment 1

 Distinguish Between Consignment and Sale

S.No. 1 Consignment Ownership of the goods rests with the consignor till the time they are sold by the consignee, no matter the goods are transferred to the consignee. The consignee can return the unsold goods to the consignor. Sale The ownership of the goods transfers with the transfer of goods from the seller to the buyer.

Goods sold are the property of the buyer and can be returned only if the seller agrees It is the buyer who will bear the loss if any, after the delivery of goods.

Consignor bears the loss of goods held with the consignee.

The relationship between the consignor and the consignee is that of a principal and agent.

The relationship between the seller and the buyer is that of a creditor and a debtor.

Expenses done by the consignee to receive the goods and to keep it safely is borne by the consignor.

Expenses incurred by the buyer are to be borne by the buyer itself after the delivery of goods.

Accounting Treatment in the books of consignor Journal Entries I. When goods are sent at cost (a) On sending the goods on Consignment Consignment A/c Dr (with cost of goods sent) To Goods sent on consignment A/c (Being goods sent on consignment) (b) On incurrence of expenses by consignor Consignment A/c Dr (With amount of expense incurred by consignor) To Cash/ Bank A/c (Being the expenses incurred) (c) On receiving security from consignee Cash/Bank/Bill Receivable A/c Dr (amount received as security from consignee) To Consignees A/c (Being Security Received from consignee) (d) On getting the bills receivable (received from consignee), discounted Bank A/c Dr (Amount of net proceeds) Discount A/c Dr (Amount of Discount) To Bills Receivable A/c (Being the B/R discounted)

(e) On receiving the goods returned from consignee Goods sent on consignment A/c Dr To Consignment A/c (Being the goods returned by the consignee) (f) On Incurrence of expenses by consignee Consignment A/c Dr (With amount of expenses incurred by consignee) To Consignees A/c (Being Sales made by consignee) (g) On sales being made by consignee Consignee A/c Dr (With the amount of sales proceeds) To Consignment A/c (Being Sales made by consignee) (h) On making the commission due to consignee Consignment A/c Dr. (With the amount of commission earned by Consignee) To Consignees A/c (Being the commission due to consignee) (i) On charging bad debts if consignee is not entitled to del-credere commission Consignment A/c Dr. (With the amount of Bad Debts) To Consignees A/c (Being the bad debts charged) (j) On receiving the balance due from the consignee Cash/Bank/Bills receivable A/c Dr. (With the amount of balance) To consignees A/c (Being the balance due from the consignee) (k) On accounting for the unsold stock with the consignee Consignment stock A/c Dr. (with the value of unsold stock) To consignment A/c (Being unsold stock with the consignee brought into account) (l) On accounting for abnormal loss of goods. (i) Profit & Loss A/c Dr. (with irrecovered loss) Insurance companys A/c Dr. (with the claim insurance company) To consignment A/c (Being abnormal loss accounted for) (ii) Cash/Bank A/c Dr. (With the claim recovered) To insurance Co.s A/c (Being the claim received) (m) On accounting for profit/loss on consignment (i) In case of Profit Consignment A/c Dr. (with the amount of profit) To profit & Loss A/c (Being the profit on consignment transferred) 3

admitted

by

(ii) In case of loss Profit & Loss A/c Dr. (with the amount of loss) To Consignment A/c (Being the loss on consignment transferred) (n) On transfer of goods sent on consignment account Goods sent on consignment A/c Dr. To trading A/c (Being goods sent on consignment account transferred to trading account) (o) On transfer of discount account (raised on discounting a bills receivable received from consignee) Profit & Loss A/c Dr. To discount A/c (Being the discount account transferred to profit & loss account) II. When goods are sent at cost plus profit In such a case, the following four additional entries besides aforesaid entries, are required to be passed to eliminate loading (i.e. Excess of Invoice price over cost price) (p) To eliminate the profit element included in goods sent on consignment Goods sent on Consignment A/c Dr. (with the amount of profit included in goods sent in unsold closing stock) To consignment A/c (Being profit included in Goods sent @ Rs. eliminated) (q) To eliminate the profit element included in closing stock lying with the consignee Consignment A/c Dr. (with the amount of profit included in unsold closing stock) To Consignment Stock Reserved A/C (Being profit included in unsold closing stock @ Rs. eliminated) (r) To eliminate the profit element included in opening stock lying with the consignee Consignment Stock Reserve A/C Dr. (with the amount of profit included in unsold opening stock) To Consignment Stock A/C (Being profit included in unsold opening stock @ Rs. eliminated) (s) To eliminate the profit element included in Goods returned by consignee Consignment A/c Dr. (With the amount of profit included in goods returned) To Good sent on consignment A/c (Being profit included in goods returned @ Rs. eliminated)

Accounting Treatment in the Book of the Consignee

Journal Entries
(a) On providing security to consignor Consignors A/c Dr. (With the amount of security to consignor) To Cash/Bank/Bill payable A/c (Being the security provided to consignor) (b) On incurring expenses on behalf of consignor Consignors A/c Dr. (With the amount of expenses incurred) To Cash/Bank A/c (Being the expenses incurred on behalf of Consignor) (c) On sale of goods on behalf of consignor Cash A/c Consignment Debtors A/c Dr. (with the amount of sales) To Consignors A/c (Being the goods sold on behalf on consignor) (d) On receipt of payment from consignment debtors Cash/bank A/c Dr, (with the amount collected from Consignment debtors) To Consignment Debtors A/c (Being the amount collected from Consignment debtors) (e) On non-relisation of any book debts (i) Because of dispute regarding quality, quantity, delivery etc. Consignors A/c Dr. To Consignment Debtors A/c (Being the debts not realized due to ) (ii) Because of insolvency of customer If del-Credere commission is given Bad debts A/c Dr. To Consignment Debtors A/c If del-Credere commission is not given Consignors A/c Dr. To Consignment Debtors A/c (f) On making the commission due from consignor Consignors A/c Dr. (With the amount of commission due from Consignor) To Commission A/c (Being the commission due from consignor) (g) On remitting the balance to consignor Consignors A/c Dr. (with the amount of balance remitted to the Consignor) To cash/Bank A/c (Being balance remitted to the Consignor)

(h) On transfer of commission account Commission A/c Dr. (with the amount of balance remitted to the Consignor) To Profit & Loss A/c (Being the commission account closed) (i) On transfer of bad debts account Profit & Loss A/c Dr. To bad debts (Being the bad debts account closed) (j) On discharging bills payable (if any accepted) Bills payable A/c Dr. (with the amount of bill payable discharged) To cash A/c Bank A/c (Being the bills payable discharged) Valuation of Stock The principle is that stock should be valued at cost or Net Realisable Value whichever is lower But in Consignment, Cost means not only the cost of goods but

Cost of goods Add: Packaging expense Freight Cartage Insurance in transit Octroi etc. Total = Cost of stock (It does not include any expenses incurred after receiving goods at consignees premises)

If details are not given for valuing stock then expenses incurred by consignor should be treated as a part of cost while those incurred by the consignee should be ignored. If the expected selling price of stock in hand is less then the cost the value put on the stock should be expected net selling price only i.e. Selling Price Expected Less: Delivery Expenses Goods Invoiced above cost Sometimes the consignor sends goods at a price which is higher than the Cost price, such price is known as Invoice price Difference between the Invoice Price and Cost Price is known as Loading It is not necessary that selling price and invoice price will be same unless consignor directs to sell the goods at the invoice price. Hence, if entries are first made on invoice basis, the effect of the loading (i.e., amount added to arrive at the invoice price) must be removed by additional entries

Goods sent on Consignment A/c Dr. To Consignment to Consignee A/c [Entry (i) reversed to the extent of loading in order to debit the Consignment A/c on cost basis]. Consignment to Consignee A/c Dr. To Stock Reserve Account (The amount of loading included in the value of the closing stock is unrealised profit hence Reserve is created by debit to the Consignment Account). For e.g. Anil sent goods to Sunil at cost +20% costing 200,000 Invoice value of the goods will be (a) Rs. 2, 50,000 (b) Rs. 2, 40,000 (c) Rs. 3, 00,000

(d) None

Ans. 2, 40,000 Explanation Cost = 100 so our Invoice price =100+20%=120 Therefore invoice value is equal to 200,000 + 20%=240,000 Here loading in goods is 40,000 i.e.(240,000-200,000) Valuation of unsold stock with consignee Particulars Step 1 Compute cost of unsold stock A) Cost of goods sent by the consignor B) Add: All expenses incurred by consignor C) Total Cost of goods sent (A+B) D) Less: Cost of goods not reached the city of the consignee a) Goods in transit b) Goods lost in transit E) Cost of goods reached the city of the consignee (C-D) F) Add: on Recurring expenses incurred by consignee G) Cost of goods received by Consignee (E+F) H) Less: Expected Normal Loss (units only) I) Cost of goods available for sale (G-H) J) Cost of unsold stock

Units

Value

Step 2 Compute Net Realizable Value

Realization Expense (e.g. commission on sales)

Step 3 Value of unsold stock Cost or Net Realizable value whichever is lower E.g. Goods sent by Mr. A to his agent Mr. B -10,000 units @ Rs20 per unit Mr. As expenses -50,000 Agent took delivery and brought the goods to his godown after incurring expenses @ Rs 1 per unit Goods sold by Agent 7,300 units @ Rs 30 Agent Commission- 5% Required calculate the amount of closing stock Case (a) If no other information is given Case (b) If owing to fall in market price, the value of normal stock is to be reduced by 10% Case (c) If owing to depression in the market a special trade discount of 10% is to be allowed to sell normal stock. Solution: Case a) Particulars Units Rs A) Cost of goods sent 10,000 200,000 B) Consignors Expenses C)Total Cost of Goods Sent (A+B) D) Add:consignees non-recurring expenses E) Cost of goods received by consignee F) Cost of unsold stock 260,000*2,700/10,000) ------10,000 ------10,000 2,700 50,000 250,000 10,000 2,60,000 70,200

Case b) Cost of closing stock Less:10% Value of closing stock to be brought into account Case c) Cost of closing stock Net Realizable value A) Gross Realizable Value (2,700 @ Rs30 *90%) B) Less: Realization expense (Agents commission) (15% of Rs.72,900) C) Net Realizable Value (A-B)

70,200 7,020 63,180

70,200 72,900 3,645 69,255 69,255

Value of closing stock to be brought into account (Cost or NRV whichever is lower)

 Types of losses
1) Normal Loss 2) Abnormal loss Normal loss is an unavoidable loss due to inherent features of the goods (E.g. evaporation normal leakage/spoilage) Treatment: It is treated as a part of cost by inflating the cost per unit No journal entry is passed to account such loss

Treatment of Normal Loss.

E.g. 1000 kg apples are consigned to wholesaler for Rs 2 per kg + expense 500 Normal loss 10% Closing Stock 50 units .Calculate the amount of Closing stock. Solution: Particulars Units Rs. Cost of Goods Sent 1000 2000 Expense -------500 Less: Normal loss(10% of 1000) 100 Refer formula given above Cost per unit =

=2.78

Closing Stock =Units Cost per unit = 50 2.78= Rs.139 Abnormal Loss Abnormal loss is an avoidable loss which occurs due to abnormal factors like fire, theft, abnormal spoilage/breakage/pilferage etc. and not due to inherent nature of goods. Treatment It is not treated as a part of cost. Valuation- Calculated same as value of Unsold Stock Case 1) Calculation of Abnormal Loss during transit = Cost of goods sent + Consignors proportionate expenses Proportionate Expenses =

Case 2) Calculation of Abnormal Loss in Consignees Godown A) Cost Price of Goods Lost in Consignees Godown B) Add: Consignors Proportionate Expenses C) Add: Consignees Proportionate Non-Recurring Expenses Proportionate Expense: .D) Cost of Abnormal Loss in Consignees Godown (A+B+C) E.g. Mr. A sent goods to Mr. his agent 10,000 units @ Rs.20 per.unit Mr. As forwarding and insurance expenses Rs.50, 000 Goods fully damaged in transit ---200 units (Insurance Co. paid 80% of loss) Agent took delivery and brought the goods to his godown expenses @ Rs.1 per unit Goods sold by agent-7,300 units @ Rs.30 Required: Calculate the amount of Closing Stock and Net Loss incurred on goods fully Damaged in transit.

after

Solution:
Statement showing the Calculation of an Unsold Stock Particulars A) Cost of goods sent by the consignor B) Add: Expenses incurred by consignor C) Total Cost of goods sent (A+B) D)Less: Cost of goods not reached the city of the consignee Goods lost in transit E)Cost of goods reached the city of the consignee (C-D) F) Add:Non Recurring expenses incurred by consignee G) Cost of goods received by Consignee (E+F) H) Less: Expected Normal Loss (units only) I) Cost of goods available for sale (G-H) J) Cost of unsold stock Calculation of Net Loss on Goods Lost in Transit Particulars Units A.Cost of Goods lost in transit B Less: Insurance Claim (80% of Rs.5,000 C Net Loss Commission: Ordinary Commission: It is based on Fixed Percentage of the gross sales proceeds made by the consignee. This type of commission does not give protection to the consignor for Bad Debts and is provided on Total sales 10 Units Rs. 10,000 2,00,000 50,000 10,000 2,50,000 200 5,000 9,800 2,45,000 9,800 9,800 2,54,800 ---9,800 2,54,800 2,500 65,000

Value 5,000 4,000 1,000

 Del-Credere Commission: Additional Commission paid by the Consignor to the Consignee for bearing the loss on account of Bad Debts, if any, arising out of credit sale of consignment goods. It is calculated on Total Sales unless there is an agreement between the Consignor and the Consignee to provide it on Credit Sales Over-Riding Commission: Over Riding Commission is an extra commission allowed by the Consignor to the Consignee to promote sales at Higher Price then price fixed by the Consignee to encourage the consignee to put hard work in introducing new product in the market. Calculation: Depending on the terms of agreement it may be calculated on the Actual Total Sales OR Difference between Actual Total Sales & Sales at Special Selling Price or Invoice Price In Absence of any such Agreement Over-Riding Commission

Return of the Goods from the Consignee Reasons: Poor Quality Not up to Specimen Destroyed in Transit Valuation: Price at which it was consigned to the Consignee. (Expenses incurred by the consignee to send the goods back to the Consignor are not taken into account because only those expenses are considered which help to bring the goods into present location and condition i.e. saleable conditions. ***********************

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