Consignment Accounting

Terms of Consignment

Manufacturers and wholesale dealers find it very profitable to sell the goods through an agent. An agent sells the goods on behalf of the sender of such goods. The person sending the goods is the ‘consignor’ or ‘principal’. The person receiving such goods is the ‘consignee’ or ‘agent’. Thus, Consignment is the shipment of goods by a manufacturer or wholesale dealer to an agent for the sale of such goods on the commission basis. An agent sells such goods on behalf of the consignor and the risk remains with the consignor or principal. An accountant must have a good understanding of terms of consignment like trade consignor, Del Credre commission etc.

Terms of Consignment

Goods sent by the consignor are known as outward consignment. Goods received by the consignee are known as inward consignment. The relationship between the consignor and consignee is that of principal and agent only.

1. Trade Consignor

Trade consignor is the person who sends the goods to the consignee or agents like a manufacturer or wholesale dealer.

2. Consignee

Consignee or agent is the person to such goods is sent. Goods received by the consignees are known as inward consignment.

3. Ordinary Commission

The ordinary commission is the fees payable by the consignor to the consignee for the sale of goods when there is no guarantee for the collection of money from the consumer. The percent (%) of the commission is lower in such a case.

Learn more about Loses on Consignment here in detail.

4. Del Credre Commission

Del Credre Commission is the additional amount which the consignor pays to the consignee for taking the responsibility of collection of debt from the customers.

When the customers make default in payment, consignee charges the amount of loss of bad debts in his books. We calculate this commission on Total sales.

Terms of Consignment

Source: freepik.com

5. Account Sales

It is a periodical statement which a consignee prepares and sends to the consignor. This statement contains details of sales (whether cash or credit), Expenses incurred, and amount of commission which is due, goods destroyed in transit, advance remitted by him etc.

6. Proforma Invoice

Consignor sends a ‘Proforma invoice’ in the form of an invoice to the consignee. It contains details regarding the nature of goods, the quantity of such or types of goods, the weight of such goods, and other measurements related to the goods and price etc.

Proforma invoice is not a regular invoice. It does not make the consignee to pay any amount mentioned in such invoice. Price mentioned in the proforma invoice is not the cost price. Price mentioned may be selling price or cost price plus arbitrary % of profit.

Solved Example on Terms of Consignment

Differentiate between normal loss and abnormal loss?

Ans.-    Normal Loss

  1. It occurs due to the nature of goods shipped like leakage, evaporation, perishable goods etc.
  2. We add the normal loss to the cost of goods and thus, it also impacts the gross profit.
  3. Normal loss is not covered by insurance companies.
  4. It is certain but it varies from time to time.

Abnormal loss

  1. Abnormal loss occurs due to unforeseen circumstances like an accident, natural calamity, fire damage etc.
  2. The abnormal loss does not impact the gross profit of the entity.
  3. Generally, insurance covers an abnormal loss.
  4. The abnormal loss is not certain due to unforeseen circumstances and situations.
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