Modern tools of marketing have made it possible for businesses to increase their sales exponentially every year. Entrepreneurs and firms have to routinely rely upon consignment transactions to facilitate delivery of their products for this purpose. Before we understand how we have to account for these transactions, let us first deal with the meaning of consignment.
Browse more Topics under Consignments
- Accounting Entries in books of Consignor
- Normal and Abnormal Loss
- Accounting Entries in books of Consignee
Meaning of Consignment
The act of consigning means to send. Since this word is used in the context of goods, consigning means sending of goods. Consignment refers to handing over of goods belonging to one person to another person without transferring ownership. People indulge in this while undertaking shipping or transport of goods.
Consignment, in simple words, means one person/firm sending goods to another person/firm for selling them on behalf of the former. The owner of the goods only transfers possession of the goods, he retains ownership over them.
The purpose of a consignment transaction is to facilitate delivery or transport of goods. The person who undertakes to keep and transport goods of others receives a commission for his services. He has to take upon himself the responsibilities and risks associated with the control over goods.
Parties to a Consignment
Now that we know the meaning of consignment, it is now noteworthy to understand that there are two parties to a consignment transaction:
- Consignor or Principal: This is the party that sends the goods. He is the actual owner of the goods.
- Consignee or Agent: This is the party that receives the goods. He does not own the goods but just keeps control over them. As the names suggest, the consignor and consignee have a principal-agent relationship between them. The consignor is principal for the consignee, who becomes his agent.
Procedure of Consignment
The first step in consignment happens when the consignor and consignee enter into an agreement of consignment. The consignee agrees to accept possession of goods from the consignor. They agree upon terms of their agreement and the commission payable in this step.
Next, the consignor hands over possession of goods to the consignee along with a proforma invoice. This document contains details about the goods transferred. Note that the consignor transfers only possession of goods and not ownership over them.
Further, the consignee now undertakes the transport and sale of these goods under his custody. Generally, he is supposed to bear all the expenses of this. He recovers all these expenses from the consignor later. The parties, however, are free to change terms regarding expenses if they want.
Finally, the consignee sends a statement called Account Sales to the consignor. This document contains details like sales made by the consignee, the expenses he incurred and commission payable to him. The consignor now pays commission to the consignee for his services at agreed rates.
Consignment vs. Sale
A consignment transaction might seem to be similar to a sale, but it is actually different on the following grounds:
|Ownership of goods remains with the consignor until the consignee sells them to a third party.||Ownership of goods is transferred from the buyer to the seller immediately upon sale.|
|The consignor and consignee have a principal-agent relationship.||The buyer and seller have a creditor-debtor relationship.|
|The consignee can return all unsold goods to the consignor.||Ownership gets transferred upon sale, so the buyer cannot return goods unless the seller agrees.|
|Expenses incurred by the consignee are borne by the consignor unless they agree otherwise.||Goods once sold become the buyer’s responsibility and the seller is not responsible for any further expenses.|
Solved Question for You
Question: Considering the meaning of consignment and its distinction with sales, list down some basic features of a consignment transaction.
Answer: A typical consignment transaction has the following basic features:
- It involves two parties: consignor and consignee.
- Consignor hands over control of his goods to the consignee.
- Ownership over goods remains with the consignor until they are sold.
- Consignee is responsible for taking care of the consignor’s goods.
- Consignee bears expenses for transport and sale of goods unless agreed otherwise.
- The consignor pays the consignee for his services with some commission on the sale of goods.