consignment.doc

AL WADI INTERNATIONAL SCHOOL ACCOUNTING A LEVEL NOTES

CONSIGNMENT ACCOUNTS

Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee), who undertakes to sell the goods. Consignment deals are made on a variety of products - from artwork, to clothing, to books. In recent years, consignment shops have become rather trendy, especially those offering specialty products, infant wear and high-end fashion items. Therefore,

Consignor is a business or person who makes a consignment to consignee.

Consignee is a business or person that holds consignor’s goods for sale and acts as consignor’s agent in selling the goods.

Consigned inventory includes goods shipped by a consignor to the consignee, who acts as an agent in selling 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. In other words, goods on consignment are included in the inventory of the consignor (i.e., seller) while they are excluded from the consignee’s (i.e., buyer’s) inventory. Consignee does not own the inventory but agrees to exercise due diligence in holding and selling consigned inventory.

Differences between sale of goods and consignment

The major differences between a sale and consignment are listed in the table below:

Sale Consignment

Ownership Transferred to the buyer along with the transfer of goods.

Property of the consignor (seller) until consigned inventory is sold by the consignee (reseller).

Goods sold on credit

Buyer is a debtor of the seller. Trade receivables and trade payables relationship.

Consignee is a debtor of the consignor. Agent and principal relationship.

Return of goods Buyer cannot return goods unless they are defective or seller agrees to take them back.

Can be returned to seller (consignor) because consigned inventory is property of the consignor until it is sold by the consignee.

CONSIGNMENT & JOINT VENTURES Page 1


Sale Consignment

Goods lost after delivery

Buyer’s loss. Seller’s (consignor’s) loss.

Worked example:

Friends Company, a manufacturer of valves, ships a consignment of gas valves to a retail store BestHome. In this case, Friends Company is a consignor while BestHome is a consignee. Friends Company pays freight costs while BestHome pays local advertising costs and credit card processing fees that are reimbursable from Friends Company. By the end of the period, BestHome sells half of the consigned goods , notifies Friends Company of the sales, retains a 15% commission, and remits cash due to Friends Company.

1. Shipment of consigned inventory:

Friends Company ships gas valves costing $7,000 on consignment to BestHome. To record the shipment of consigned inventory, Friends Company makes the following journal entry:

Account Titles Debit Credit

Inventory (Consignments) $7,000

Finished Goods Inventory $7,000

BestHome does not make any journal entry. Mere receipt of the consigned goods does not make the consignee a debtor of the consignor. In addition, the consignee does not record the goods as an asset in its books as such goods is the property of the consignor until it is sold.

2.2. Accounting for payment of freight costs by consignor2. Payment of freight costs by consignor:

Friends Company shipped the gas valves to BestHome through a third-party shipping company, which charged Friends Company $600 for shipping goods from the factory to the consignee (i.e., BestHome). To record the shipping expense, Friends Company makes the following journal entry:


Inventory (Consignments) $600

Trade Payable (or Cash) $600



Again, BestHome does not make any journal entry.2.3. Accounting of payment of advertising by consignee

3. Expenses incurred in connection with consignment:

Friends Company does not make any journal entry until it is notified by the consignee (e.g., receives an Account Sales Report). Usually a consignee is entitled to be reimbursed for expenses incurred in connection with the consignment (i.e., it depends on the consignment agreement). Such expenses may include credit card processing fees, storage and insurance costs, unloading charges, local advertising costs, etc.

BestHome paid $1,000 cash for local advertising costs. The consignee would make the following journal entry:


Trade receivable (from Friends Company) $1,000

Cash $1,000

2.4ccounting for sale of consigned merchandise4. Sale of consignment:

By the end of the period, BestHome sells 50% of the consigned gas valves for $8,000. According to the consignment agreement, BestHom must receive a 15% commission on the sales (i.e., $1,200 = $8,000 x 0.15) and must be reimbursed for the 2% credit card processing fee (i.e., $160 = $8,000 x 0.02).

Friends Company does not make any journal entry until it is notified by the consignee (e.g., receives an Account Sales Report). BestHome would make the following journal entry to record the sale of the consigned goods:


Cash $8,000

Trade payables (Friends Company) $8,000

Expenses incurred in connection with consignment




Trade Receivable (from Friends Company)

$160

Cash $160

2

5. Notification of sales and expenses and receipt of cash from consignee:

BestHome notifies Friends Company of the sales and expenses by sending an Account Sales Report, retains a 15% commission, and remits cash due to Friends Company. Friends Company makes the following journal entry:


Cash $5,640

Advertising Expense $1,000

Commission Expense $1,200

Credit card fee $160

Revenue from Consignment Sales $8,000

BestHome makes the following journal entry:


Trade Payable (Friends Company) $8,000

Trade receivable (from Friends Company)

$1,160

Commission Revenue $1,200

Cash $5,640

6. Adjustment of inventory on consignment:

Inventory on consignment should be adjusted for the cost of sales. To record the transfer of the inventory cost to the cost of goods sold, Friends Company makes the following journal entry:




Cost of Goods Sold [50% x ($7,000 + 600)]

$3,800

Consignment Inventory $3,800

The cost of goods sold in this example includes not only 50% of the original inventory cost (i.e., $3,500 = $7,000 x 0.50) but also 50% of the shipping expense (i.e., $300 = $600 x 0.50). BestHome does not make any journal entry.

Consignment benefit and risks:

Depending on the nature of a consignment arrangement, the following benefits and risks may arise for consignor and consignee, respectively:

Consignor (Seller) Consignee (Buyer)

Benefits• Business expansion with reduced

initial and on-going costs

• Reduced inventory holding costs

• Better understanding of user demand and timing of production and supply chain activities

• Operational savings

• Reduced investment in inventory

• Operational savings

• Access to a wider range of inventory

Commission on sale

Risks No inventory sales

Inventory lost after delivery

Risk to retain unsalable or obsolete inventory

Extra inventory warehousing and handling costs not paid by consignor

4. Consig

Points to remember:

Consignor remains the owner of goods even after sending to consignee. Consignor does not send any Invoice rather a Performa invoice. The Amount of Sales belongs to Consignor. All the exp. are to be borne by Consignor. If borne by consignee, recoverable from consignor. Consignee entitled to Commission. Consignee entitled to de-credere commission if he is responsible for bad debts.



Consignee sends a statement called Account Sales, periodically.

Accounting Treatment Of Consignment Or Accounts Maintained BY The ConsignorA consignment account is a combined form of trading and profit and loss account solely to

the concerned consignment. It can be treated as nominal account. An independent

consignment account for each and consignment to the name of place or consignee is to be

prepared in order to ascertain the profit or loss from that consignment.

In order to keep complete record of consignment transactions, the consignor maintains the

following accounts:

* Consignment Account

* Consignee's Account

* Goods sent on consignment Account

The following entries are made in the books of the consignor for goods sent at proforma

invoice price or cost price:

1. For the goods sent on consignment

Consignment to .........A/C......................Dr.

To Goods sent on consignment A/c

2. For the expenses incurred by consignor

Consignment to.........A/C..............Dr.



To Bank A/C

3. For the advance received from consignee

Bank/Cash/Bills receivable A/C............Dr.

To Consignee's A/C

4. For the bills discounted

Bank A/C...................Dr.

To Bills receivable

5. For discount on bills transferred to profit and loss account

Profit and loss A/C...................Dr.

To Discount A/c

6. For expenses paid by consignee

Consignment to..............A/c.................Dr.

To Consignee's A/c

7. For the goods sold by consignee

Consignee's A/c.................Dr.

To consignment to.................A/c



8. For the commission due to consignee

Consignment to .................A/C

To consignee's A/C

9. For closing stock with consignee

Consignment stock A/C...........Dr.

To consignment to.......A/c

10. For profit or loss on consignment

For profit earned on consignment

Consignment to........A/C..................Dr.

To Profit and loss A/C

For loss on consignment

Profit and loss A/C.....................Dr.

To consignment to.............A/C

11. For final settlement of account with consignee

Bank A/c...............Dr.

To Consignee's A/c



12.For goods sent on consignment transferred to trading account(by a

manufacturing company) or purchase account(by a trader)

Goods sent to consignment A/C..............Dr.

To trading/ purchase A/C

Difference Between Joint Venture And ConsignmentThe main differences between joint venture and consignment are as under:

1. Nature

Joint venture: It is a temporary partnership business without a firm name.

Consignment: It is an extension of business by principal through agent.

2. Parties

Joint venture: The parties involving in joint venture are known as co-ventures.

Consignment: Consignor and consignee are involving parties in the consignment.

3. Relation

Joint venture: The relation between co-ventures is just like the partners in partnership firm.

Consignment: The relation between the consignor and consignee is 'principal and agent'.

4. Sharing Profit

Joint venture: The profits ans losses of joint venture are shared among the co-ventures in

their agreed proportion.



Consignment: The profits and losses are not shared between the consignor and consignee.

Consignee gets only the commission.

5. Rights

Joint venture: The co-ventures in a joint venture have equal rights.

Consignment: In consignment, the consignor enjoys principal's right whereas consignee

enjoys the right of agent.

6. Exchange Of Information

Joint venture: The co-ventures exchange the required information among them regularly.

Consignment: The consignee prepares an account sale which contains a details of business

activities carried on and is being sent to the consignor.

7. Ownership

Joint Venture: All the co-ventures are the owners of the joint venture.

Consignment: The consignor is the owner of the business.

8. Method Of Maintaining Accounts

Joint venture: There are different methods of maintaining accounts in joint venture.As per

agreement the co-ventures maintain their account.

Consignment: In consignment, there is only one method of maintaining account.

9. Basis Of Account



Joint venture: Cash basis of accounting is applicable in joint venture.

Consignment: Actual basis is adopted in consignment.

10. Continuity

Joint venture: As soon as the particular venture is completed, the joint venture is

terminated.

Consignment: The continuity of business exists according to the willingness of both

consignor and consignee.

A joint venture occurs when two or more businesses join together to pursue

acommon project

Basics on joint ventures

With a joint venture, businesses remain separate in legal terms

Joint ventures are common, as firms want to benefit from collaborative

work in reaching a mutually agreed strategic target.

Many joint ventures seek to share the fixed costs of major business research /

infrastructure projects

Examples of joint ventures include:

Vodafone & Telefónica agreed in 2012 to share more of their mobile network

(with more than 18,500 mobile mast sites). This was a response to Everything

Everywhere – a JV between T-Mobile and Orange

Vodafone has a joint venture with Verizon Wireless in the United States

BMW and Toyota agreed a partnership in 2011 to co-operate on hydrogen

fuel cells, vehicle electrification, lightweight materials and a future sports car.



Partnership agreements between competing automakers are common in as

manufacturers seek to pool efforts on costly technologies

West Coast – between Virgin Rail /Stagecoach

Google and NASA developing Google Earth

Hollywood studios combining to fight internet piracy

Renault-Nissan's joint venture with Indian firm Bajaj to produce a £1,276 car

Intertrust Technologies - between Sony and Philips

Alliances in the airline industry e.g. Star Alliance and One World

Starbucks' expansion in India through a joint venture with the giant Tata

industrial group

Nokia Siemens Joint Networks

Joint Ventures between universities to deliver Massive Open Online

Courses(MOOCs) – a fast-expanding sector of the higher education industry

Govia, a joint venture between Go-Ahead Group and Keolis of France which

will operate the Thameslink rail franchise in London

Talk Talk agreeing in 2014 a joint venture with Sky to provide a fibre network

in York

Every one of the world's 24 biggest carmakers by sales now operates some

form of alliance or joint venture with another large carmaker.

Joint ventures

Two businesses agree to start a new project together, sharing capital, risks and profits.

Pros: Shared costs are good for tackling expensive projects. (e.g aircraft)



Pooled knowledge. (e.g foreign and local business) Risks are shared.

Cons: Profits have to be shared. Disagreements might occur. The two partners might run the joint venture differently.



nee’s accounting controls for consigned inventory





Candidates should be able to distinguish between consignments and joint ventures and the environment in which they operate. Candidates should be able to:

• Prepare ledger accounts for consignment transactions, including the calculation of closing inventory valuation

• Prepare ledger accounts for joint ventures and calculate the profit for joint ventures.


consignment.doc

Documents

consigned goods

consignors goods

sale of goods

finished goods inventory

transfer of goods

consignor seller

seller consignor

buyers inventory