Consignment Accounting

Losses on Consignment

A consignment is an act of sending a number of goods by the manufacturers or producers to their agents for the purpose of sale. The person sending the goods is the Consignor (the manufacturer or producer) and the agent receiving the goods is the Consignee. Goods sent on consignment are not the property of consignee as he has not purchased them. Thus, the ownership of goods remains with the consignor. Thus, the unsold goods appear as the stock or inventory in the books of the consignor and not the consignee. However, there are also Losses on Consignment which we will discuss here.

Losses on Consignment

The consignee sells the goods as per the directions of the consignor. After selling the goods, he deducts his expenses, commission, etc., from the sale proceeds and remits the balance to the consignor.

In a case where the goods are destroyed, the consignee is not responsible and thus, he shall not bear the loss. Hence, the consignor will have to bear this loss.

There are two types of losses that can arise in a consignment transaction:

  1. Normal loss.
  2. Abnormal loss.

Normal loss

A normal loss means a loss which is inherent in nature and cannot be avoided. It usually arises due to natural causes such as evaporation, leakage, breakage, etc. We consider it while valuing the closing stock by deducting the quantity of loss from the total quantity.

It is important to note that we deduct only the quantity and not the amount of normal loss. Also, it requires no additional adjustment as it is a charge against the gross profit. Here, there is no requirement to pass separate journal entries to record it.

For example, 10000 liters of kerosene is consigned, it is obvious that some of it will evaporate. This is a normal loss.

$$ \text{Value of Closing Stock} = \text{Total Value of goods sent} \times {\frac{\text{Unsold quantity}}{\text{Good Quantity received by the consignee}}} $$

Losses on Consignment

Source: freepik.com

Abnormal loss

Abnormal losses are losses that occur accidentally or due to the carelessness. A loss by theft or losses by fire, flood, earthquake, war, accidents, in transit, etc. are abnormal losses.

These losses are avoidable and not inherent in nature. These losses reduce the value of closing stock as well as profit. We need to find out the cost of goods that are lost.

Learn more about Accounting Entries in the Books of Consignor here in detail

After finding out the value, credit the Consignment A/c and debit the Abnormal Loss A/c. We then transfer the abnormal loss to Profit And Loss A/c, to arrive at the correct profit or loss of consignment.

Journal Entries

1. When the loss is irrecoverable:

Date Particulars  Amount (Dr)  Amount (Cr)
1. On occurring of loss Abnormal loss A/c Dr.          xxx
     To Consignment A/c Cr. xxx
(Being value of abnormal loss)
2. On transferring loss to P&L A/c Profit and loss a/c Dr. xxx
     To Abnormal loss Cr. xxx
(Being transfer of loss)

2. When the loss is insured and is recoverable:

1. When fully recoverable

Date Particulars Amount (Dr) Amount (Cr)
1. On occurring of loss Abnormal loss a/c Dr. xxx
     To Consignment a/c Cr. xxx
(Being abnormal loss)
2. When claim due Insurance company a/c Dr. xxx
     To Abnormal loss a/c Cr. xxx
(Being transfer of abnormal loss to insurance co.)

2. When partly recoverable

Date Particulars Amount (Dr) Amount (Cr)
1. On occurring of loss Abnormal loss a/c Dr. xxx
     To Consignment a/c Cr. xxx
(Being abnormal loss)
2. When claim due partly Insurance company a/c (amount recoverable) Dr. xxx
Profit & loss a/c (amount not recoverable) Dr. xxx
     To Abnormal loss a/c Cr. xxx
(Being loss partly recoverable from insurance co. and transfer of the balance to profit and loss a/c)

Solved Example on Losses on Consignment

On 1st Jan 2018, Alok sent a consignment of 6,000 kg of rice, costing ₹ 50 per kg to an agent Bala on commission at 5% on gross sales. Alok incurs freight and insurance of ₹1500 regarding the goods. He also incurs Dock charges and sundry expenses of ₹500.

Bala incurs expenses of godown rent and insurance of ₹500 and miscellaneous expenses of ₹800.

Some packages containing 800 kg of rice got damaged in transit and became unfit for sale.

4000 kg of rice was sold at ₹70 per kg.

Prepare consignment account and Bala’s account in the books of Alok showing the amount due from Bala on 31st Jan 2018.

Ans.

                                                      In the books of Alok

Consignment A/c

Date Particulars Amount Date Particulars Amount
1 Jan To goods sent on consignment 300,000 31 Jan By Bala’s a/c- sales (4000 x 70) 2,80,000
1 Jan To bank a/c (Freight, insurance, Dock charges, sundry expenses) 2000 31 Jan By abnormal loss a/c (Loss in transit) 40267
31 Jan To Bala’s a/c (Godown rent, insurance, Miscellaneous expenses) 1300 31 Jan By consignment stock a/c 60400
31 Jan To Bala’s a/c (commission) 14000
31 Jan To profit and loss a/c (Profit) 63367
380667 380667

 

Bala’s A/c

Date Particulars Amount Date Particulars Amount
31 Jan To Consignment A/c ( sales) 2,80,000 31 Jan By Consignment A/c 1300
31 Jan By Consignment A/c (commission) 14000
31 Jan By balance c/d 264700
2,80,000 2,80,000

Working note:

Calculation of unsold stock and lost in transit:                                   ₹

Cost of 6,000 kg @ ₹50                                                                  300,000

Add:  direct expenses:                                                                          2000

Cost for 6,000 kg                                                                                 302000

$$Value of unsold stock = \frac{302000 x 1200}{6000}= 60400$$

$$Value of goods lost in transit =\frac{302000 x 800}{6000}= 40267$$

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