Consignment Accounting

Consignment and Sale-distinction

The consignment sale is a commercial arrangement between two parties. As per consignment arrangement, the seller delivers the goods to the agent, for the purpose of sale to the customers, on behalf of the seller. The term consignment is generally juxtaposed with Sale. Typically, Sale is a transaction between two parties in which the ownership, title and possession goods transfers to the buyer from the seller for consideration. The scope of sale is wider, as consignment is also a type of sale. The primary difference between these two trading arrangements is that in the case of consignment there is a relationship of principal and agent, whereas, in the case of the sale, the parties follow the relationship of seller and buyer.

Consignment and Sale- distinction

Definition of Consignment

The word consignment has evolved from the word ‘consign’. Consign means ‘to send’. A consignment is a contract between consignor and consignee, whereby the consignor is the principal and the consignee is the agent.

Consignor dispatches the goods to the consignee for the purpose of selling it to the ultimate consumer on behalf of the principal. In consignment, the consignor dispatches the goods to the consignee at cost or invoice.

Learn more about Losses on Consignment here in detail.

Definition of Sale

A sale is a transaction between two parties in which the exchange of goods for price takes place. It is a contract in which a proposal is made by a seller to the buyer to buy or sell goods or property for monetary value and the buyer accepts the same.

All the characteristics of a valid contract like the capacity of parties, free consent, lawful object, agreement, lawful consideration, etc. shall exist in the sale contract.

A  sale is a bargain deal between the parties in which the risk and rewards are transferred from one party to the another with the transfer of goods.

consignment sale

Source: freepik.com

Key Differences Between Consignment and Sale

The following are the key differences between consignment and sale:

  1. When goods are forwarded by the owner to his agent for sale for a fixed commission, it is Consignment. Whereas, A Sale is a transaction between two parties where the trade of goods occurs for a mutual benefit.
  2. The parties to a consignment are consignor and consignee whereas the parties to the sale are buyer and seller.
  3. The relationship between parties of a consignment is of principal and agent, but in the sale contract, they are debtor and creditor.
  4. In consignment concept, only the possession of goods transfers to consignee, not the ownership. On the other hand, in the sale transactions, the ownership and possession both are transferred to the buyer.
  5. In consignment, the consignee can return the unsold goods to the consignor while the buyer has to take permission of the seller for returning the goods in case of sale.
  6. All the risks and rewards rest with the consignor in case of consignment. Conversely, the risks and rewards are transferred to the buyer by the seller in case of sale.
  7. In consignment, consignee gets remuneration for his services in the form of commission based on sales made by him. Whereby the seller earns profit from the sales made in case of sale transactions.
  8. In the case of consignment, the consignor generally bears the expenses that the consignee incurs in connection with the goods. Whereas in sale transactions, expenses incurred by the buyer, after its completion, will be borne by the buyer.
  9. In consignment, the consignee prepares and submits an ‘Account Sales’ periodically to the consignor. But in the case of a sale, buyer submits no ‘Account sales’ to the seller.

Questions on Consignment and Sale-distinction

A sent some goods to B for the purpose of selling on behalf of A. B will earn some commission on the sale of these goods. All risk and rewards are related to A. This is a case of consignment or sale?

Ans:

Since all risk and rewards are not transferred to B. B will earn some commission on the sale of these goods. Therefore it is a case of consignment.

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