Topic 3- Consignment – Book Keeping Form 4
The Account in the Consignors and Consignee’s Books
Consignment Overview
Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee), who undertakes to sell the goods. The consignor continues to own the goods until they are sold, so the goods appear asinventoryin the accounting records of the consignor, not the consignee.
When the consignor sends goods to the consignee, there is no need to create an accounting entry related to the physical movement of goods. It is usually sufficient to record the change in location within the inventory record keeping system of the consignor. In addition, the consignor should consider the following maintenance activities:
- Periodically send a statement to the consignee, stating the inventory that should be on the consignee’s premises. The consignee can use this statement to conduct a periodic reconciliation of the actual amount on hand to the consignor’s records.
- Request from the consignee a statement of on-hand inventory at the end of each accounting period when the consignor is conducting a physical inventory count. The consignor incorporates this information into its inventory records to arrive at a fully valued ending inventory balance.
- It may also be useful to occasionally conduct an audit of the inventory reported by the consignee.
From the consignee’s perspective, there is no need to record the consigned inventory, since it is owned by the consignor. It may be useful to keep a separate record of all consigned inventory, for reconciliation and insurance purposes.
When the consignee eventually sells the consigned goods, it pays the consignor a pre-arranged sale amount. The consignor records this prearranged amount with a debit to cash and a credit to sales. It also purges the related amount of inventory from its records with a debit to cost of goods sold and a credit to inventory. A profit or loss on the sale transaction will arise from these two entries.
Depending upon the arrangement with the consignee, the consignor may pay a commission to the consignee for making the sale. If so, this is a debit to commission expense and a credit to accounts payable.
Riaz Sugar Factory of Multan, consigned to Mr. Shahid of Lahore 400 bags of sugar at $25 per bag. They also paid cartage, freight, etc. $250. The consignor drew on consignee as an advance against the consignment at 3 months for $6,000 which they discounted at their bank at 5 percent. The consignee sold off the goods and rendered an account sales showing that the goods realized $12,000, out of which he deducted his charges amounting to $80 and his commission at 5 percent.
Required: Make journal entries in respect of the above transactions in the books of consignor as well as the consignee
Dr. | Cr. | |
$ | $ | |
Consignment to Lahore account | 10,000 | |
To Goods sent on consignment account | 10,000 | |
Consignment to Lahore account | 250 | |
To Bank account | 250 | |
Bills receivable account | 6,000 | |
To Shahid Ali | 6,000 | |
Bank account | 5,925 | |
Discount account | 75 | |
To Bills receivable account | 6,000 | |
Shahid Ali | 12,000 | |
To Consignment to Lahore account | 12,000 | |
Consignment to Lahore account | 680 | |
To Shahid Ali | 680 | |
Bank | 5320 | |
To Shahid Ali | 5320 | |
Consignment to Lahore account | 1,070 | |
To Profit and loss account | 1,070 | |
Goods sent on consignment account | 10,000 | |
To Trading account | 10,000 |
$ | $ | ||
Dr. | Cr. | ||
To Goods sent on consignment | 10,000 | By Shahid Ali – Sales Proceeds | 12,000 |
To Bank expenses | 250 | ||
To Shahid Ali | 680 | ||
To Profit and loss account | 1,070 | ||
12,000 | 12,000 |
$ | $ | ||
Dr. | Cr. | ||
To Trading account | 10,000 | By Consignment to Lahore | 10,000 |
Dr. | Cr. | ||
$ | $ | ||
To Bills receivable | 5,925 | By Consignment to Lahore | 250 |
To Shahid Ali | 5,320 |
Dr. | Cr. | ||
$ | $ | ||
To Consignment to Lahore | 12,000 | By Bills receivable | 6,000 |
By Consignment to Lahore | 680 | ||
By Bank account | 5,320 | ||
12,000 | 12,000 |
Dr. | Cr. | ||
$ | $ | ||
To Shahid Ali | 6,000 | By Bank | 5,925 |
By Discount | 75 | ||
6,000 | 6,000 |
Dr. | 0 | Cr. | 0 |
0 | $ | 0 | $ |
To Bills receivable | 75 | By Profit and loss account | 75 |
Dr. | Cr. | ||
$ | $ | ||
By Consignment to Lahore | 1,070 |
Dr. | Cr. | ||
$ | $ | ||
By Goods sent on consignment | 10,000 |
Dr. | Cr. | |
$ | $ | |
Riaz sugar factory | 6,000 | |
To Bills payable account | 6,000 | |
Riaz sugar factory | 80 | |
To Bank account | 80 | |
Bank account | 12,000 | |
To Riaz sugar factory | 12,000 | |
Riaz sugar factory | 600 | |
To Commission account | 600 | |
Riaz sugar factory | 5,320 | |
To Bank account | 5,320 | |
Bills payable | 6,000 | |
To Bank account | 6,000 |
Dr. | Cr. | ||
$ | $ | ||
To Bills payable | 12,000 | By Bank account | 12,000 |
To Bank – expenses | 80 | ||
To Commission | 600 | ||
To Bank – Balance | 5,320 | ||
12,000 | 12,000 |
Dr. | Cr. | ||
$ | $ | ||
To Riaz sugar factory | 12,000 | By Riaz sugar factory | 80 |
By Riaz sugar factory | 5,320 | ||
By Bills payable | 6,000 |
Dr. | Cr. | ||
$ | $ | ||
To Profit and loss account | 600 | By Riaz sugar factory | 600 |
Dr. | Cr. | ||
$ | $ | ||
To Bank | 6,000 | By Riaz sugar factory | 6,000 |
Prepare consignment account and Bashir’s account in the books of A & Co., assuming that nothing has been recovered from the insurance company due to defect in the policy.
$ | $ | ||
To Goods sent on consignment | 1,50,000 | By sales (800 × 220) | 1,76,000 |
To Bank – freight and insurance | 11,500 | By Profit and loss account – Ab. Loss* | 16,150 |
To Bashir – duty | 14,400 | By Stock on consignment** | 17,750 |
To Bashir – expenses | 2,000 | ||
To Bashir – commission | 8,800 | ||
To Profit and loss account | 23,200 | ||
2,09,900 | 2,09,900 |
Bashir
$ | $ | |||
To Consignment account | 1,76,000 | By Bank | 50,000 | |
By Consignment account | ||||
Duty | 14,400 | |||
Expenses | 2,000 | |||
16,400 | ||||
By Consignment account-commission | 8,800 | |||
By Balance c/d | 1,00,800 | |||
1,76,000 | 1,76,000 | |||
(1) | *Calculation of abnormal loss: | |
100 motors at $150 each | $15,000 | |
Add 100/1000 of freight and insurance (11,500 × 100/1000) | 1,150 | |
Abnormal loss | 16,150 | |
(2) | **Calculation of Closing Stock: | |
100 motors at $150 each | $15,000 | |
Add 100/1000 of freight and insurance (11,500 × 100/1000) | 1,150 | |
100/900 of duty | 1,600 | |
Closing stock or unsold stock | 17,750 |
Problem 3 (Invoicing Goods Higher Than Cost):
Rashid of city A sends 100 sewing machines on consignment to Malik of city B. The cost of each machine is $130 but the invoice price is at the rate of $160 each. Rashid spends $400 on packing and despatch. Malik receives the consignment and immediately accepts Rashid’s draft for $8000.
Subsequently, Malik informs Rashid that 80 machines have been sold at $175 each. Expenses paid by Malik are; freight $600, godown rent $50, and insurance $100. Malik is entitled to a commission of 6 per cent on sales and 1-1/2 percent as del credere commission.
Journal
Consignment to city B | 16,000 | |
To Goods sent on consignment account | 16,000 | |
(100 machines at $160 each sent on consignment) | ||
Consignment to city B | 400 | |
To Cash account | 400 | |
(Expenses incurred on consignment) | ||
Bills receivable account | 8,000 | |
To Malik | 8,000 | |
(Malik’s acceptance received) | ||
Malik | 14,000 | |
To Consignment to city B account | 14,000 | |
(80 machine’s sold Malik at $175 each) | ||
Consignment to city B account | 750 | |
To Malik | 750 | |
(Expenses incurred) | ||
Consignment to city B account | 1,050 | |
To Malik | 1,050 | |
(Commission at 6% plus 1-1/2 on sales) | ||
Consignment to city B account | 600 | |
To Stock reserve account | 600 | |
(Difference in closing stock adjusted) | ||
Stock on consignment account | 3,400 | |
To Consignment to city B account | 3,400 | |
(Value of 20 machines in the hands of Malik) | ||
Goods sent on consignment account | 3,000 | |
To Consignment to city B account | 3,000 | |
(The difference in the invoice value and cost, $30 per machine adjusted) | ||
Goods sent on consignment account | 13,000 | |
To Trading account | 13,000 | |
(Transfer of goods sent on consignment to trading account) | ||
Consignment to city B account | 1,600 | |
To Profit and loss account | 1,600 | |
(Transfer of profit on consignment) |
Consignment to City B Account
$ | $ | |||
To Goods sent on consignment | 16,000 | By Malik – Sales proceed | 14,000 | |
To Cash – Expenses | 400 | By Stock on consignment | 3,400 | |
To Malik – Expenses: | By Goods sent on consignment | 3,000 | ||
Freight | 600 | |||
Rent | 50 | |||
Insurance | 100 | |||
750 | ||||
To Malik – Commission | 1,050 | |||
To Consignment stock reserve | 600 | |||
To Profit and loss account | 1,600 | |||
20,400 | 20,400 |
$ | $ | ||
To Consignment to city B account | 14,000 | By Bills receivable account | 8,000 |
By Consignment to city B account | |||
Expenses | 750 | ||
Commission | 1,050 | ||
By Balance c/d | 4,200 | ||
14,000 | 14,000 |
The Transfer of the Consignee’s and Consignee’s Accounts to the Profit and Loss Account
Show the transfer of the consignee’s and consignee’s accounts to the profit and Loss Account
Profit and Loss Account
Dr. | Cr. | ||
$ | $ | ||
By Consignment to Lahore | 1,070 |
Activity 2
Show the consignment Inward Account in the book of the Consignee