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Accounting for consigned goods October 15, 2011
Accounting guide about consigned goods; definitions of consignment, consignee, consignor; examples of consignment journal entries; consignment benefits, risks and controls.
1. Definition of consignor, consignee, and consigned inventory Let us start with several definitions related to accounting for goods on consignment. Consignor is is a business or person who makes a consignment to consignee.
Consignee is a business or person that holds ho lds consignors goods for sale and acts as consignors ag
selling the goods.
Consigned inventory includes goods shipped b! a consignor to the consignee, who acts a s an age
selling the goods.
"onsigned inventor! is the propert! of the consignor, not the consignee, until until it is sold b! the consign #n other words, goods on consignment are included in the inventor! of the consignor $i.e., seller% whil the! are e&cluded from the consignees $i.e., bu!ers% inventor!. inventor!. "onsignee does not own the invent but agrees to e&ercise due diligence in holding and selling consigned merchandise. 'he ma(or differences between a sale and consignment are listed in the table below) Sale !ners"ip
'ransferred 'ransferred to the bu!er along with the *ropert! of the consignor $seller% until transfer of goods. consigned inventor! is sold b! the consignee $reseller%.
#oods sold on +u!er is a debtor of the seller. credit $eturn of goods
Consignment
"onsignee is a debtor of the consignor. Sign up to vote on this title ebtor-creditor relationship. Agent-principal relationship. Useful Not useful +u!er cannot return goods unless the! "an be returned to seller $consignor% are defective or seller agrees to take because consigned inventor! is propert!
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notifies /riends "ompan! of the sales, retains a 15 commission, and remits cash due to /riends "ompan!.
Consignment Accounting Consignment Overview
Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consign
who undertakes to sell the goods. The consignor continues to own the goods until they are sold, s goods appear as inventory in the accounting records of the consignor, not the consignee.
Consignment Accounting - Initial Transfer of Goods
When the consignor sends goods to the consignee, there is no need to create an accounting entry
related to the physical movement of goods. is usually icient to record the change in location You'retReading a suff Preview within the inventory record keeping system of the consignor. n addition, the consignor should Unlock full access with a free trial. consider the following maintenance activities!
Download With Free Trial "eriodically send a statement to the consignee, stating the inventory that should be on th
consignee#s premises. The consignee can use this statement to conduct a periodic reconciliation o actual amount on hand to the consignor#s records.
$e%uest from the consignee a statement of on&hand inventory at the end of each account
period when the consignor is conducting a physical inventory count. The consignor incorporates th
Sign up to vote on this balance. title information into its inventory records to arrive at a fully valued ending inventory
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t may also be useful to occasionally conduct an audit of the inventory reported by the consignee.
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epending upon the arrangement with the consignee, the consignor may pay a commission to the
consignee for making the sale. f so, this is a debit to commission epense and a credit to accoun payable. 'rom the consignee#s perspective, a sale transaction triggers a payment to the consignor for the
consigned goods that were sold. There will also be a sale transaction to record the sale of goods t third party, which is a debit to cash or accounts receivable and a credit to sales.
Accounting for consigned goods %.1. Accounting for s"ipment of consigned merc"andise
/riends "ompan! ships gas valves costing 3,000 on consignment to +estome. Consignor ) to record the shipment of consigned inventor!, /riends "ompan! makes the following (o entr!) Consignor: shipment of consigned inventory Account 'itles
Debit
Credit
#nventor! $"onsignments% 3,000 /inished 4oods #nventor! 3,000 You're Reading a Preview Consignee ) +estome does not make an! (ournal entr!. ere receipt of the consigned goods does make the consignee a debtor of the consignor. addition, does not record the Unlock full #n access with a the free consignee trial. merchandise as an asset in its books as such merchandise is the propert! of the consignor until it is
%.%. Accounting for payment of freig"t costs consignor Download Withby Free Trial
Consignor ) /riends "ompan! shipped the gas valves to +estome through a third-part! shipping
compan!, which charged /riends "ompan! 600 for shipping goods from the factor! to the consigne $i.e., +estome%. 'o record the shipping e&pense, /riends "ompan! makes the following (ournal entr Consignor: payment of freight costs by consignor Account 'itles
Debit
#nventor! $"onsignments%
600
Accounts *a!able $or "ash% Consignee ) +estome does not make an! (ournal entr!.
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Debit
Credit
"ash
1,000
Accounting for consigned goods %.). Accounting for sale of consigned merc"andise
+! the end of the period, +estome sells 50 of the consigned gas valves for 8,000. According to t consignment agreement, +estom must receive a 15 commission on the sales $i.e., 1,200 9 8,0 0.15% and must be reimbursed for the 2 credit card processing fee $i.e., 160 9 8,000 & 0.02%. Consignor ) /riends "ompan! does not make an! (ournal entr! until it is notified b! the consignee $e receives an Account ales 7eport%. Consignee ) +estome would make the following (ournal entr! to record the sale of the consigned go Consignee: sale of consigned merchandise Account 'itles
Debit
"ash *a!able to /riends "ompan!
8,000
Credit
8,000
Consignee: expenses incurred in connection with consignment Account 'itles
7eceivable from /riends "ompan! "ash
Debit
Credit
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160 Unlock full access with a free trial.
%.*. Accounting for notification of sales and expenses
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+estome notifies /riends "ompan! of the sales and e&penses b! sending an Account ales 7epor retains a 15 commission, and remits cash due to /riends "ompan!. Consignor ) /riends "ompan! makes the following (ournal entr!) Consignor: notification of sales and expenses and receipt of cash from consignee Account 'itles
Debit
"ash Advertising ;&pense "ommission ;&pense
5,6:0 1,000 1,200
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#nventor! on consignment should be ad(usted for the cost of sales. Consignor ) to record the transfer of the inventor! cost to the cost of goods sold, /riends "ompan! makes the following (ournal entr!) Consignor: recognize the cost of goods sold Account 'itles
Debit
"ost of 4oods old <50 & $3,000 = 600%> "onsignment #nventor!
?,800
Credit
?,800
'he cost of goods sold in this e&le includes not onl! 50 of the original inventor! cost $i.e., ?,50 3,000 & 0.50% but also 50 of the shipping e&pense $i.e., ?00 9 600 & 0.50%) Consignee ) +estome does not make an! (ournal entr!.
Accounting for consigned goods (. Consignment benefits and risks
#t is important to anal!@e consignment arrangements to understand the rights and obligations of cons You're Reading a Preview and consignee as well as the benefits and risks both parties are e&posed to. hen preparing or ana Unlock full access with a free trial. a consignment agreement, e&amine the following issues) •
hen does ownership transfer $change%B
•
ho takes the risk associated with inventor! storageB
•
ho takes the risk associated with inventor! obsolescenceB
•
hich tracking procedures are $will be% usedB
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epending on the nature of a consignment arrangement, the following benefits risks ma! arise f Sign up to vote onand this title consignor and consignee, respectivel!) Useful Not useful Consignor Sellerenefits
Consignee uyer-
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Consignee uyer-
;&tra inventor! warehousing and handling costs un-reimbursable b! consignor
). Consignee/s accounting controls for consigned inventory
•
•
•
#t is important for a consignee to properl! monitor and audit the consigned inventor!. 'hree ma(or accounting controls for consigned merchandise include) #dentification) consigned inventor! should be prominentl! labeled with an identification tag $e colored tag% when such inventor! is received. eparate colored receiving reports ma! be used. #n computer s!stem, consigned inventor! should be recorded with a uniDue part number. egregation) consigned inventor! should be ph!sicall! segregated from other inventor!. /o e&le, a part of a warehouse can be set aside for consigned inventor!. "onsigned merchandis should be stored in a safe place protected from various ha@ards such as fire, theft, etc. onitoring) consigned inventor! should be monitored b! the materials review board in order determine whether the consigned inventor! is obsolete.
#n addition to the above-listed accounting controls, consignee could use the following consigned inve practices) •
•
•
•
ire independent audit firm for periodic audits of inventor! and consigned inventor! controls report the findings to the consignor.
You're Reading a Preview Allow the consignor to inspect consigned inventor!. Unlock access withmerchandise. a free trial. et minimum and ma&imum levels forfull consigned
;stablish a ma&imum amount of time consigned inventor! can be retained before it becomes Download obsolete $should keep in mind shelf-life issues%. With Free Trial
/inall!, periodicall! the consignee must send an Account ales 7eport to the consignor. 'he Accoun ales 7eport shows the merchandise received, merchandise sold, e&penses chargeable $i.e., reimbursable% to the consignment, and the cash remitted. 'hen, revenue can be recogni@ed b! the consignor. Sign up to vote on this title
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