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CONSIGNMENT ACCOUNTS
occurs when goods are sent by their owner (the consignor) to an agent (the Consignment occurs goods. Consignmen Consignmentt deals are made on a variety of consignee) , who undertakes to sell the goods. products - from artwork, to clothing, to books. In recent years, consignment shops have become rather trendy, especially those offering specialty products, infant wear and high-end fashion items. Therefore, Consignor is is a business or person who makes a consignment to consignee. Consignee is a busi busine ness ss or pers person on that that hold holds s cons consig igno nor’s r’s good goods s for for sale sale and and acts acts as
consignor’s agent in selling the goods. Consigne in!entor" includes goods shipped by a consignor to the consignee, who acts as an
agent in selling the goods. The The cons consig igno norr cont contin inue ues s to own own the the good goods s unti untill they they are are sold sold,, so the the good goods s appe appear ar as inventory in the accounting records of the consignor, not the consignee. In other words, goods on consignment are included in the inventory of the consignor (i.e., seller while they are e!cluded from the consignee’s (i.e., buyer’s inventory. Consignee does not own the inventory but agrees to e!ercise due diligence in holding and selling consigned inventory. Di##erences $et%een s&'e o# goos &n consignment
The ma"or differences between a sale and consignment are listed in the table below# S&'e O%nershi
Consignment
Trans Transfer ferred red to the buyer buyer along along with with $roperty of the consignor (seller until the transfer of goods. cons consig igne ned d inve invent ntory ory is sold sold by the the consignee (reseller.
Goo Goos so' on %uyer is a debtor of the seller. Trade Consignee creit rece receiivabl vables es and and trad trade e pay payable ables s consi onsign gnor or..
relationship.
is a debtor of the &gent gent and and princ rincip ipal al
relationship.
Retrn o# goos %uye %uyerr cann cannot ot retu return rn good goods s unle unless ss Can be returned to seller (consignor
they are defective or seller agrees to bec because ause consi onsign gned ed inve invent ntor ory y is take them back. property of the consignor until it is sold by the consignee. Goos Goos 'ost &#ter %uyer ’s loss. e'i!er"
CONSIGNMENT * +OINT VENTURES
'eller’s (consignor’s loss.
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Wor.e e/&m'e0
riends Company, a manufacturer of valves, ships a consignment of gas valves to a retail store %est)ome. In this case, riends Company is a consignor while %est)ome is a consignee . riends Company pays freight costs while %est)ome pays local advertising costs and credit card processing fees that are reimbursable from riends Company. %y the end of the period, %est)ome sells half of the consigned goods , notifies riends Company of the sales, retains a *+ commission, and remits cash due to riends Company. *. Shiment o# consigne in!entor"0 riends Company ships gas valves costing ,/// on consignment to %est)ome. To record the shipment of consigned inventory, riends Company makes the following "ournal entry# Accont Tit'es
Inventory (Consignments
De$it
Creit
,///
inished 0oods Inventory
,///
1estHome oes not m&.e &n" 2orn&' entr"3 1ere receipt of the consigned goods does
not make the consignee a debtor of the consignor. In addition, the consignee does not record the goods as an asset in its books as such goods is the property of the consignor until it is sold. 2.2. Accounting for payment of freight costs by consignor 43 ,&"ment o# #reight costs $" consignor0 riends Company shipped the gas valves to %est)ome through a third-party shipping company, which charged riends Company 2// for shipping goods from the factory to the consignee (i.e., %est)ome. To record the shipping e!pense, riends Company makes the following "ournal entry# Accont Tit'es
Inventory (Consignments Trade $ayable (or Cash
De$it
Creit
2// 2//
Ag&in5 1estHome oes not m&.e &n" 2orn&' entr"3 2.3. Accounting of payment of advertising by consignee
63 E/enses incrre in connection %ith consignment0
CONSIGNMENT * +OINT VENTURES
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riends Company does not make any "ournal entry until it is notified by the consignee (e.g., receives an &ccount 'ales 3eport. 4sually a consignee is entitled to be reimbursed for e!penses incurred in connection with the consignment (i.e., it depends on the consignment agreement. 'uch e!penses may include credit card processing fees, storage and insurance costs, unloading charges, local advertising costs, etc. %est)ome paid *,/// cash for local advertising costs. The consignee would make the following "ournal entry# Accont Tit'es
De$it
Creit
Trade receivable (from riends Company *,/// Cash
*,///
2.4ccounting for sale of consigned merchandise 73 S&'e o# consignment0
%y the end of the period, %est)ome sells +/ of the consigned gas valves for 5,///. &ccording to the consignment agreement, %est)om must receive a *+ commission on the sales (i.e., *,6// 7 5,/// ! /.*+ and must be reimbursed for the 6 credit card processing fee (i.e., *2/ 7 5,/// ! /./6. riends Company does not make any "ournal entry until it is notified by the consignee (e.g., receives an &ccount 'ales 3eport. %est)ome would make the following "ournal entry to record the sale of the consigned goods# Accont Tit'es
De$it
Cash
Creit
5,///
Trade payables (riends Company
5,///
E/enses incrre in connection %ith consignment Accont Tit'es
Trade 3eceivable Company Cash
De$it
(from
riends
Creit
*2/ *2/
6
83 Noti#ic&tion o# s&'es &n e/enses &n receit o# c&sh #rom consignee0
CONSIGNMENT * +OINT VENTURES
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%est)ome notifies riends Company of the sales and e!penses by sending an &ccount 'ales 3eport, retains a *+ commission, and remits cash due to riends Company. riends Company makes the following "ournal entry#
Accont Tit'es
De$it
Cash
+,28/
&dvertising 9!pense
*,///
Commission 9!pense
*,6//
Credit card fee
*2/
3evenue from Consignment 'ales
Creit
5,///
1estHome m&.es the #o''o%ing 2orn&' entr"0 Accont Tit'es
De$it
Trade $ayable (riends Company
5,///
Trade
(from riends Company Commission 3evenue
receivable
Creit
*,*2/ *,6//
Cash
+,28/
93 A2stment o# in!entor" on consignment0
Inventory on consignment should be ad"usted for the cost of sales. To record the transfer of the inventory cost to the cost of goods sold, riends Company makes the following "ournal entry# Accont Tit'es
De$it
Cost of 0oods 'old :+/ ! (,/// ; =,5// 2//< Consignment Inventory
Creit
=,5//
The cost of goods sold in this e!ample includes not only +/ of the original inventory cost (i.e., =,+// 7 ,/// ! /.+/ but also +/ of the shipping e!pense (i.e., =// 7 2// ! /.+/. %est)ome does not make any "ournal entry.
CONSIGNMENT * +OINT VENTURES
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Consignment $ene#it &n ris.s0
>epending on the nature of a consignment arrangement, the following benefits and risks may arise for consignor and consignee, respectively#
Consignor (Se''er) 1ene#its
? ? ?
Ris.s
Consignee (1"er)
%usiness e!pansion with reduced ? initial and on-going costs ? 3educed inventory holding costs ? %etter understanding of user demand and timing of production and supply chain activities
•
?
@perational savings
•
Ao inventory sales
•
Inventory lost after delivery
•
•
3educed investment in inventory @perational savings &ccess to a wider range of inventory Commission on sale
3isk to retain unsalable or obsolete inventory 9!tra inventory warehousing and handling costs not paid by consignor
4. Consig Points to remember:
Consignor remains the owner of goods even after sending to consignee. Consignor does not send any Invoice rather a $erforma invoice. The &mount of 'ales belongs to Consignor. &ll the e!p. are to be borne by Consignor. If borne by consignee, recoverable from consignor. Consignee entitled to Commission. Consignee entitled to de-credere commission if he is responsible for bad debts. Consignee sends a statement called &ccount 'ales, periodically.
Acconting Tre&tment O# Consignment Or Acconts M&int&ine 1: The Consignor & consignment account is a combined form of trading and profit and loss account solely to the concerned consignment. It can be treated as nominal account. &n independent consignment account for each and consignment to the name of place or consignee is to be prepared in order to ascertain the profit or loss from that consignment. CONSIGNMENT * +OINT VENTURES
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In order to keep complete record of consignment transactions, the consignor maintains the following accounts#
B Consignment &ccount B Consignees &ccount B 0oods sent on consignment &ccount
The following entries are made in the books of the consignor for goods sent at proforma invoice price or cost price#
-3 ;or the goos sent on consignment Consignment to .........A/C......................Dr. To Goods sent on consignment A/c
43 ;or the e/enses incrre $" consignor Consignment to.........A/C..............Dr. To Bank A/C
63 ;or the &!&nce recei!e #rom consignee Bank/Cash/Bills receivable A/C............Dr. To Consignee's A/C
73 ;or the $i''s isconte
CONSIGNMENT * +OINT VENTURES
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Bank A/C...................Dr. To Bills receivable
83 ;or iscont on $i''s tr&ns#erre to ro#it &n 'oss &ccont Profit and loss A/C...................Dr. To Discount A/c
93 ;or e/enses &i $" consignee Consignment to..............A/c.................Dr. To Consignee's A/c
<3 ;or the goos so' $" consignee Consignee's A/c.................Dr. To consignment to.................A/c
=3 ;or the commission e to consignee Consignment to .................A/C To consignee's A/C
>3 ;or c'osing stoc. %ith consignee Consignment stock A/C...........Dr. To consignment to.......A/c
CONSIGNMENT * +OINT VENTURES
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-?3 ;or ro#it or 'oss on consignment For rofit earned on consignment Consignment to........A/C..................Dr. To Profit and loss A/C For loss on consignment Profit and loss A/C.....................Dr. To consignment to.............A/C
--3 ;or #in&' sett'ement o# &ccont %ith consignee Bank A/c...............Dr. To Consignee's A/c
-43;or
goos
sent
on
consignment
tr&ns#erre
to
tr&ing
&ccont($"
&
m&n#&ctring com&n") or rch&se &ccont($" & tr&er) Goods sent to consignment A/C..............Dr. To trading/ urchase A/C
Di##erence 1et%een +oint Ventre An Consignment The main differences between joint venture and consignment are as under:
-3 N&tre !oint venture" It is a temporary partnership business without a firm name.
CONSIGNMENT * +OINT VENTURES
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Consignment" It is an e!tension of business by principal through agent.
43 ,&rties !oint venture" The parties involving in "oint venture are known as co-ventures. Consignment" Consignor and consignee are involving parties in the consignment.
63 Re'&tion !oint venture" The relation between co-ventures is "ust like the partners in partnership firm. Consignment" The relation between the consignor and consignee is principal and agent.
73 Sh&ring ,ro#it !oint venture" The profits ans losses of "oint venture are shared among the co-ventures in
their agreed proportion. Consignment" The profits and losses are not shared between the consignor and consignee.
Consignee gets only the commission.
83 Rights !oint venture" The co-ventures in a "oint venture have eDual rights. Consignment" #n consignment$ the consignor en%o&s rincial's right hereas consignee en%o&s the right of agent.
93 E/ch&nge O# In#orm&tion !oint venture" The co-ventures e!change the reDuired information among them regularly.
CONSIGNMENT * +OINT VENTURES
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Consignment" The consignee prepares an account sale which contains a details of business
activities carried on and is being sent to the consignor.
<3 O%nershi !oint (enture" &ll the co-ventures are the owners of the "oint venture. Consignment # The consignor is the owner of the business.
=3 Metho O# M&int&ining Acconts !oint venture" There are different methods of maintaining accounts in "oint venture.&s per
agreement the co-ventures maintain their account. Consignment" In consignment, there is only one method of maintaining account.
>3 1&sis O# Accont !oint venture" Cash basis of accounting is applicable in "oint venture. Consignment" &ctual basis is adopted in consignment.
-?3 Continit" !oint venture" &s soon as the particular venture is completed, the "oint venture is
terminated. Consignment" The continuity of business e!ists according to the willingness of both
consignor and consignee.
& "oint venture occurs when two or more businesses "oin together to pursue acommon ro2ect 1&sics on 2oint !entres CONSIGNMENT * +OINT VENTURES
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•
Eith a "oint venture, businesses remain separate in legal terms
•
Foint ventures are common, as firms want to benefit from co''&$or&ti!e %or. in reaching a mutually agreed strategic target.
•
1any "oint ventures seek to share the fi!ed costs of ma"or business research G infrastructure pro"ects
E/&m'es o# 2oint !entres inc'e0 •
Vo&#one * Te'e#@nic& agreed in 6/*6 to share more of their mobile network
(with more than *5,+// mobile mast sites. This was a response to 9verything •
9verywhere H a F between T-1obile and @range Vo&#one has a "oint venture with eriJon Eireless in the 4nited 'tates
•
1MW &n To"ot& agreed a partnership in 6/** to co-operate on hydrogen
fuel cells, vehicle electrification, lightweight materials and a future sports car. •
$artnership agreements between competing automakers are common in as manufacturers seek to pool efforts on costly technologies
•
West Co&st H between irgin 3ail G'tagecoach
•
0oogle and A&'& developing Goog'e E&rth
•
Ho''"%oo stios combining to fight internet piracy
•
3enault-Aissans "oint venture with Indian firm %a"a" to produce a K*,62 car
•
Intertrst Techno'ogies - between 'ony and $hilips
•
A''i&nces in the &ir'ine instr" e.g. 'tar &lliance and @ne Eorld
•
St&r$c.s e!pansion in India through a "oint venture with the giant T&t& instri&' gro
•
No.i& Siemens Foint Aetworks
•
Foint entures between universities to deliver M&ssi!e Oen On'ine Corses(1@@Cs H a fast-e!panding sector of the higher education industry
CONSIGNMENT * +OINT VENTURES
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Go!i& , a "oint venture between 0o-&head 0roup and Leolis of rance which
will operate the Thameslink rail franchise in Mondon •
Talk Talk agreeing in 6/*8 a "oint venture with 'ky to provide a fibre network in Nork
•
9very one of the %or's 47 $iggest c&rm&.ers by sales now operates some form of alliance or "oint venture with another large carmaker.
Joint ventures
Two businesses agree to start a new project together, sharing capital, risks and profits. Pros: •
•
•
Shared costs are good for tackling expensive projects. (e.g aircraft) Pooled knowledge. (e.g foreign and local business) isks are shared.
!ons: •
•
•
Profits have to be shared. "isagree#ents #ight occur. The two partners #ight run the joint venture differentl$.
nees accounting controls for consigned inventory
CONSIGNMENT * +OINT VENTURES
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CONSIGNMENT * +OINT VENTURES
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CONSIGNMENT * +OINT VENTURES
ACCOUNTING
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Candidates should be able to distinguish between consignments and "oint ventures and the environment in which they operate. Candidates should be able to# ?
$repare ledger accounts for consignment transactions, including the calculation of closing inventory valuation
?
$repare ledger accounts for "oint ventures and calculate the profit for "oint ventures.
CONSIGNMENT * +OINT VENTURES
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