Consignment Accounts

Introduction to Consignment

Consignment is a kind of business expansion without really opening a branch

in a new potential market.
In consignment, a manufacturer or wholesaler despatches goods to an agent
who has a better knowledge of the local market, for the purpose of sale.
The person sending the goods is called the Consignor and the agent who
receives the goods is called the Consignee.
The consignee markets the product within his own periphery and receives
commission at a stipulated rate on the total sales. The consignee is also entitled
to recover such expenses which he incurs in connection with the consignment.
The consignee does not only market the product but discharges the function of
sales promotion also.
If the consignee fails to perform this function, he may well be replaced by
another agent. On the other hand, if the consignee finds that the business is not
remunerative enough for him, he may well give it up and may not be interested
to renew the contract for consignment.

Economies of Consignment

Consignment flourishes because of its inherent economies.

First, it is cost-saving. It dispenses with the need of branch opening at distant

places with all its cost implications.
Secondly, the manufacturer may not have the capacity to open branches while
he intends to tap distant markets. Consignment fulfills both the needs.

Consignment facilitates expansion without much initial and on-going cost. It is the
simplest and more economical way of territorial expansion and as such a mode of
growth for manufacturing companies.
Distinction between Sale and Consignment

Sale Consignment
In case of sale, property in the goods is In case of a consignment, goods remain
transferred to the buyer along with the the property of the consignor until the
transfer of goods. time they are sold by the consignee.
Goods once sold cannot be returned to the Unsold goods of consignment are the
seller except when they are defective or property of the consignor and can be
the seller agrees to take those back. returned to him.
When goods are sold on credit, the buyer When goods are sold on credit, the buyer
becomes the debtor of the seller. The becomes the debtor of the consignor. The
relationship between the buyer and the relationship between the consignor and
seller is that of debtor and creditor. the consignee is that of a principal and an
agent.
When goods are lost after delivery to the When goods are lost on consignment, it is
buyer, it is the buyer who will bear the the consignor who will bear the loss.
loss.

Procedure for Consignment Transactions

The consignor sends goods to the consignee along with a Proforma Invoice. It is a
memorandum invoice and serves as a guide to the consignee in respect of (a)
description of the goods, and (b) minimum selling price to be realized.In the case of
foreign consignments, the Proforma Invoice serves as a prime document for customs
clearance.

When goods are sent to the consignee, the consignor makes a record of the
consignment giving full details of the goods, their cost prices and the expenses
incurred.

After receiving goods, the consignee tries to sell them at the best possible price. It
should be noted that mere receipt of the goods does not make the consignee a debtor
of the consignor. He becomes indebted to in respect of the consignment such as
unloading charges, godown rent, etc. for which he is entitled to be reimbursed. It is the
duty of the consignee to remit the proceeds of sales after deducting his expenses in
respect of the consignment and his own commission, to the consignor. The details of
sale proceeds, expenses and commission are contained in an accompanying statement
known as Account Sales.

An Account Sales is a statement which is periodically rendered by the consignee to

the consignor, showing the details about the goods sold, price realized, his own
commission, and the expenses incurred in connection with the sale.
Example

On 15th November, 1989, Kapil & Co. of Chandigarh consigned 250 bicycles to Arun
& Co. of Kolkata. On 31st December, 1989, Arun forwarded an Account Sales, with a
bank draft for the balance, showing the full transactions:

1. 200 Bicycles sold @Rs. 600 each and 50@Rs. 560 each
2. Unloading charges Rs. 500
3. Storage and Insurance Rs. 1000
4. Commission on Sales @10%

You are required to prepare an Account Sales.

Solution:

Arun & Co. 35, Park Street, Kolkata-700016

31st December, 1989
Account Sales of 250 Bicycles sold by order and for account of Kapil & Co.
Gross Proceeds Rs. Rs.
200 @Rs. 600 each 1,20,000
50 @Rs. 560 each 28000 1,48,000

Less:
Unloading Charges 500
Storage & Insurance 1000
Commission @10% on Rs. 1,48,000 14,800 16,300

Net Proceeds 1,31,700

Bank Draft enclosed Rs. 1,31, 700 E & OE

(Signed) Arun & Co., Kolkata

Entries in the books of the Consignor

The primary objective of preparing the consignment account is to ascertain the

profit or loss on each consignment separately. For this purpose, the consignor
prepares one Consignment account for each consignment. This special account is
always named with either the consignee or the place, for example Consignment to
Arun & Co. Account or Consignment to Kolkata Account just to distinguish one
consignment from another. Consignment account is a nominal account. In fact, it is a
combined Trading and Profit & Loss account related solely to the consignment. This
account is debited with (a) Opening Stock on Consignment (if any), (b) Cost of goods
sent on consignment, (c) expenses incurred by the consignor, such as freight,
insurance for sending goods, (d) expenses incurred by the consignee such as
unloading charges, godown rent, etc. and (e) consignees commission on sales. This
account is credited with (a) gross sales proceeds, (b) closing stock (if any). The
balance of this account represents profit or loss which is transferred to Profit & Loss
on Consignment Account. At the year end, the balance of the Profit & Loss on
Consignment Account is transferred to the General Profit & Loss account.

The secondary objective of the consignor is to ascertain the amount due from the
consignee. For this purpose, he opens one personal account of the consignee. The
consignee account is debited with the gross sales proceeds and credited with (a)
advance made by him (if any), (b) expenses incurred by him in respect of the
consignment, and (c) his own commission on sales. The balance of this account shows
the amount due from the consignee.

The consignment may price the goods sent on consignment either at cost price or
at a higher price which is called the Invoice price. The accounting procedure in two
cases is slightly different.

COST PRICE METHOD

A. Journal Entries in the books of the Consignor

1. For sending goods to the consignee

Consignment to..A/c Dr (cost price)

To Goods sent on consignment A/c (cost price)

(Being goods sent on consignment to..)

2. For payment of expenses by the consignor

Consignment to.A/c Dr

To Cash or Bank A/c (If paid)

To Creditors for Expenses A/c (If unpaid)

(Being expenses incurred for sending the goods)

3. For receipts of advance from the consignee

(a) When payment is received in cash or Bank draft

Cash or Bank A/c Dr

To Consignee A/c
(Being advance received from the consignee)

(b) When a bill is drawn by the consignor and accepted by the consignee

Bills Receivable A/c Dr

To Consignee A/c

(Being a bill drawn on consignee for .months)

4. When Account Sales is received from the consignee

Immediately after receiving the Account Sales, the consignor passes the following
entries:

(a) For sale of goods by the consignee in cash

Consignee A/c Dr (Gross Sales Proceeds)

To Consignment to..A/c

(Being goods sold by the consignee)

(b) For expenses incurred by the consignee

Consignment to..A/c Dr

To Consignee A/c

(Being expenses paid by the consignee in respect of the consignment)

(c) For the commission of the consignee

Consignment to..A/c Dr

To Consignee A/c

(Being commission charged by the consignee)

(d) For receiving remittance from the consignee

Cash or Bank A/c Dr

To Consignee A/c

(Being the remittance received from the consignee along with Account Sales)
 5. If the consignee completes the sales before the end of the consignors
accounting year, the consignor closes the Consignment Account by passing
the following entries:

(a) When there is a profit on consignment

Consignment to..A/c Dr

To Profit and Loss on Consignment A/c

(Being profit on consignment transferred to Profit and Loss on Consignment Account)

(b) When there is a Loss on Consignment

Profit and Loss on Consignment A/c Dr

To Consignment to..A/c

(Being loss on consignment transferred to the Profit and Loss on Consignment

Account)

6. At the end of the financial year, the Goods Sent on Consignment Account
is closed by passing the following entries:

(a) If the consignor is a manufacturer

Good Sent on Consignment A/c Dr

To Trading A/c

(Being the adjustment for goods sent on consignment)

(b) If the consignor is a wholesaler

Goods Sent on Consignment A/c Dr

To Purchase A/c

(Being the adjustment for goods sent on consignment)

Example -1

On 1st March, 1990 Kamal of Calcutta sends 1000 boxes of tea to Bimal of Bombay
on consignment basis. Each box costing Rs. 500. Kamal pays railway freight Rs. 1000
and insurance Rs. 2000 and draws upon Bimal a bill for Rs. 2,00,000 for 3 months
which was duly accepted and returned.

On 30th September, 1990 Bimal forwards an Account Sales to Kamal showing that
500 boxes have been sold @Rs. 560 each while 300 boxes were sold @Rs. 550 each
and the remaining boxes were sold @Rs. 540 each. The expenses incurred by Bimal
consisted of carriage Rs. 500, godown rent Rs. 3500. Bimal is entitled to a
commission @5% on gross sales proceeds. He encloses a cheque for the balance due
to Kamal.

Show how these transactions would be recorded in the books of Kamal (the
Consignor), assuming that the bill of exchange was duly met on its due date. Assume
that Kamal closes the books of accounts on 31st December every year.

Solution:

In the books of Kamal (Consignor)

Journal Entries
Date Particulars Debit Amt Credit
(Rs.) Amt (Rs.)
1990 Consignment to Bimal A/c Dr 5,00,000
March 1. To Goods Sent on Consignment A/c 5,00,000
(Being goods sent on consignment to Bombay)
March 1. Consignment to Bimal A/c Dr 3000
To Cash A/c 3000
(Being freight Rs. 1000 and insurance Rs. 2000
paid for sending the goods)
March 1. Bills Receivable A/c Dr 2,00,000
To Bimal A/c 2,00,000
(Being the bill drawn on Bimal for 3 months)
June 4. Bank A/c Dr 2,00,000
To Bills Receivable A/c 2,00,000
(Being the bill met at maturity)
Sept. 30 Bimal A/c Dr 5,53,000
To Consignment to Bimal A/c 5,53,000
(Being goods sold by Bimal)
Sept. 30 Consignment to Bimal A/c Dr 4000
To Bimal A/c 4000
(Being expenses paid by Bimal in respect of
consignment)
 Sept. 30 Consignment to Bimal A/c Dr 27,650
To Bimal A/c 27,650
(Being commission charged by Bimal @5% on
Rs. 5,53,000)
Sept. 30 Bank A/c Dr 3,21,350
To Bimal A/c 3,21,350
(Being a cheque received for the balance due)
Sept. 30 Consignment to Bimal A/c Dr 18,350
To Profit & Loss on Consignment A/c 18,350
(Being profit on consignment transferred to
Profit and Loss on Consignment Account)
Dec. 31 Profit & Loss on Consignment A/c Dr 18,350
To Profit & Loss A/c 18,350
(Being transferred to Profit and Loss Account)
Dec. 31 Goods Sent on Consignment A/c Dr 5,00,000
To Purchases A/c 5,00,000
(Being the adjustment for goods sent on
consignment)

Necessary Ledger Accounts to be opened in the books of Kamal (Consignor):

1. Consignment to Bimal Account

2. Goods Sent on Consignment Account
3. Bimal Account
4. Profit & Loss on Consignment Account

Consignment to Bimal A/c

Date Particulars Rs. Date Particulars Rs.
1990 1990
Mar. 1 To Goods sent on 5,00,000 Sept. 30 By Bimal A/c (Sales) 5,53,000
Consignment A/c

Mar. 1 To Cash A/c 3000

(Expenses)

Sept. 30 To Bimal A/c

(Expenses)
- Carriage 500
- Godown Rent 3500
- Commission 27,650

To Profit & Loss on 18,350

Consignment A/c -
Transfer

5,53,000 5,53,000
 Bimal A/c
Date Particulars Rs. Date Particulars Rs.
1990 1990
Sept. 30 To Consignment to 5,53,000 Mar. 1 By Bills Receivable A/c 2,00,000
Bimal A/c Sales
Sept. 30 By Consignment to
Bimal A/c (Expenses)
- Carriage 500
- Godown Rent 3500
- Commission 27,650

By Bank A/c (Amt. 3,21,350

remitted to Consignor)
5,53,000 5,53,000

Goods Sent on Consignment A/c

Date Particulars Rs. Date Particulars Rs.
1990 1990
Dec. 31 To Purchases A/c - 5,00,000 Mar. 1 By Consignment to 5,00,000
Transfer Bimal A/c
5,00,000 5,00,000

Profit & Loss on Consignment A/c

Date Particulars Rs. Date Particulars Rs.
1990 1990
Dec. 31 To Profit & Loss A/c - 18,350 Sept. 30 By Consignment to 18,350
Transfer Bimal A/c
18,350 18,350

General Profit & Loss A/c for the year ended 31-12-1990 [Extract]
Particulars Rs. Rs. Particulars Rs. Rs.
By Profit & Loss on 18,350
Consignment A/c -
Transfer
B. Journal Entries in the books of the Consignee

1. For Goods received on Consignment

No entry is required in the books of the consignee

2. For payment of expenses in respect of the consignment

Consignor A/c Dr

To Cash or Bank A/c

(Being expenses incurred by the consignee in respect of the consignment)

3. For Sale of goods by the Consignee in Cash

Cash or Bank A/c Dr

To Consignor A/c

(Being goods sold for cash on behalf of the consignor)

4. For Commission received by the consignee

Consignor A/c Dr

To Commission A/c

(Being commission received by the consignee on goods sold)

5. For sending a remittance to the consignor

Consignor A/c Dr

To Cash or Bank A/c

(Being remittance made to the consignor)

6. For Advance made to the Consignor

(a) When payment is made by cash or bank draft

Consignor A/c Dr

To Cash or Bank A/c

(Being the payment of advance in respect of the consignment)

(b) When a bill of exchange is accepted by the consignee

Consignor A/c Dr

To Bills Payable A/c

(Being the bill accepted for.months)

Solution to the Last Problem (Example -1):

In the books of Bimal (Consignee)

Journal Entries
Date Particulars Debit Amt Credit
(Rs.) Amt (Rs.)
1990 Kamal A/c Dr 2,00,000
March 1. To Bills Payable A/c 2,00,000
(Being the bill accepted by Bimal for 3 months)
June 4. Bills Payable A/c Dr 2,00,000
To Bank A/c 2,00,000
(Being the bill met at maturity)
Sept. 30 Cash or Bank A/c Dr 5,53,000
To Kamal A/c 5,53,000
(Being goods sold for cash)
Sept. 30 Kamal A/c Dr 4000
To Cash A/c 4000
(Being expenses paid in respect of consignment)
Sept. 30 Kamal A/c Dr 27,650
To Commission A/c 27,650
(Being commission received by Bimal @5% on
Rs. 5,53,000)
Sept. 30 Kamal A/c Dr 3,21,350
To Bank A/c 3,21,350
(Being the balance amount remitted to consignor)
Incomplete Consignment and Valuation of Closing Stock

It is not necessary that all consignments should be completed during the accounting
year. There may be certain consignments which are incomplete when the consignors
accounting year comes to an end. Under such a situation, the consignee will be
required to submit an Account Sales stating the amount of goods sold, expenses and
commission up to the last date of the accounting year. After receiving the Account
Sales, the unsold stock left with the consignee should be valued. The stock so valued
should be credited to the Consignment Account.

The necessary Journal entries in the books of the Consignor are given as follows:

1. Stock on Consignment A/c Dr

To Consignment to..A/c

(Being the value of stock of incomplete consignment)

2. In the Balance Sheet, this stock is shown as an asset. In the next accounting year,
this stock is transferred to Consignment Account. The following entry is passed:

Consignment to..A/c Dr

To Stock on Consignment A/c

(Being the opening stock on consignment brought into account)

Valuation of Unsold Consignment Stock:

Valuation of Closing Stock

Particulars Rs. Rs.
Cost price of goods sent XXX

Add: Consignors Expenses

Freight XXX
Carriage XXX
Loading and Unloading charges XXX
Insurance on goods sent XXX
Export and Import Duties XXX
Dock dues, etc. XXX XXX
Add: Consignees Expenses
Cartage XXX
Landing charges XXX
Clearing charges XXX
Unloading Charges XXX
Storage & Insurance costs, etc. XXX XXX

XXX
Total Cost

Total Cost x Unsold Quantity

Cost of Unsold Goods = Total Quantity

Note: - If there is information regarding market price given in the question, the
valuation of Closing Stock should always be taken at the lower of the Cost Price or
Market Price. (Applying the Principle of Conservatism)

Note: - Cost Price includes all expenditures incurred in bringing the goods to a
saleable condition and all non-recurring expenses incurred for sending the goods up to
the consignees place. (The Recurring expenditures incurred after the goods have
reached the consignees place should be ignored for the valuation of closing stock
such as Godown rent, carriage on sales, establishment expenses, insurance cost or
any other selling expenses).

Example 2:

On 30th September, 1989, Deys Medical of Kolkata sends 500 cases of medicine
costing Rs. 1000 per case to Medicine Corner of Delhi on consignment basis. Deys
Medical incurred the following expenses; Packing expenses @Rs. 20 per case (paid in
cash), insurance premium Rs. 2000 (paid by cheque), Freight Rs. 10,000 (paid in
cash), and forward agents expenses Rs. 1000 (due).

On 31st December, 1989, Medicine Corner forwards an Account Sales to Deys

Medical showing that 200 cases have been sold @Rs. 1250 per case while 250 cases
were sold @Rs. 1200 per case, and the rest 50 cases remained unsold. Medicine
Corner paid the following expenses; Cartage Rs. 2000, Unloading charges Rs. 1000
and Rs. 2000 as Godown rent. Account Sales accompanied an account payee cheque
for Rs. 4, 00,000.

Under the agreement, Medicine Corner was to receive 5% commission on sales.

You are required to prepare the necessary Ledger Accounts and Balance Sheet in the
books of Deys Medical, Kolkata. Assume that the books of accounts of Deys
Medical, Kolkata are closed on 31st December every year.
 IN THE BOOKS OF DEYS MEDICAL, KOLKATA (CONSIGNOR)

Consignment to Delhi A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Sept. 30 To Goods sent on 5,00,000 Dec. 31 By Medicine Corner 5,50,000
Consignment A/c A/c (Sales)
[200 @ Rs. 1250 + 250
Sept. 30 To Cash A/c @ Rs. 1200]
- Packing 10,000
- Freight 10,000 Dec. 31 By Stock on 52,600
Consignment A/c
Sept. 30 To Bank A/c [Refer to Working
- Insurance Note-1]
Premium 2000

Sept. 30 To Creditors for

Expenses
- Forwarding
Agents 1000
expenses

Dec. 31 To Medicine Corner

A/c (Expenses)
- Cartage 2000
- Unloading 1000
- Godown Rent 2000
- Commission 27,500

To Profit & Loss on 47,100

Consignment A/c -
Transfer
6,02,600 6,02,600

Medicine Corner A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Consignment to 5,50,000 Dec. 31 By Bank A/c (Amt. 4,00,000
Delhi A/c Sales remitted to Consignor)
Dec. 31 By Consignment to
Delhi A/c (Expenses)
- Cartage 2000
- Unloading 1000
- Godown Rent 2000
- Commission 27,500

By Balance c/d 1,17,500

5,50,000 5,50,000
 Goods Sent on Consignment A/c
Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Trading A/c - 5,00,000 Sept. 30 By Consignment to 5,00,000
Transfer Delhi A/c
5,00,000 5,00,000

Profit & Loss on Consignment A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Profit & Loss A/c - 47,100 Dec. 31 By Consignment to 47,100
Transfer Delhi A/c
47,100 47,100

Balance Sheet as on 31-12-1989 [Extract]

Liabilities Rs. Rs. Assets Rs. Rs.
Medicine Corner 1,17,500
Stock on Consignment 52,600

Working Note 1: Valuation of Closing Stock

Particulars Rs. Rs.

Cost price of goods sent (500 cases @ Rs. 1000 per case) 5,00,000

Add: Consignors Expenses

Freight 10,000
Packing 10,000
Insurance 2000
Forwarding Agents Expenses 1000 23,000

Add: Consignees Expenses

Cartage 2000
Unloading Charges 1000 3000

Total Cost 5,26,000

Rs. 5, 26,000 x 50
Value of Closing Stock = 500 = Rs. 52, 600
Example 3:

On 1st January, 1988 Chatterjee Brothers of Kolkata shipped to Shanton Brothers of

Tokyo 400 musical instruments of the value of Rs. 350 each. Chatterjee Brothers
incurred the following expenses on the consignment: Cartage Rs. 150, Freight Rs.
1950 and Insurance Rs. 250. The Charges incurred by Shanton Brothers were as
follows: Landing Charges Rs. 450, Storage Rs. 1500 and Rs. 1250 as fire insurance
premium on stock.

On 31st December, 1988 an Account Sales was received from Shanton Brothers
disclosing that 350 instruments were sold out at Rs. 950 per instrument. Towards the
close of the year, suddenly a new type of instrument appeared in the market and there
was no possibility of selling the balance of the goods at a high price. The market price
fell down to Rs. 250 per instrument. In the Account Sales, besides their expenses,
Shanton Brothers charged commission @ 15% on the gross sale proceeds. The unsold
goods were held by them. A bank draft for the amount due was sent along with the
Account Sales.

You are required to prepare the necessary Ledger Accounts and Balance Sheet in the
books of Chatterjee Brothers, Kolkata. Assume that the books of accounts of
Chatterjee Brothers, Kolkata are closed on 31st December every year.

Solution:
In the books of Chatterjee brothers, Kolkata (Consignor)

Consignment to Tokyo A/c

Date Particulars Rs. Date Particulars Rs.
1988 1988
Jan. 1 To Goods sent on 1,40,000 Dec. 31 By Shanton Brothers 3,32,500
Consignment A/c A/c (Sales)
[350 @ Rs. 950]
Jan. 1 To Cash A/c
- Cartage 150 Dec. 31 By Stock on
- Freight 1950 Consignment A/c 10,625
- Insurance 2500 [Refer to Working
Note-1]
Dec. 31 To Shanton Brothers
A/c (Expenses)
- Landing charges 450
- Storage 1500
- Insurance 1250
- Commission 49,875

To Profit & Loss on 1,45,450

Consignment A/c -
Transfer

3,43,125 3,43,125
 Shanton Brothers A/c
Date Particulars Rs. Date Particulars Rs.
1988 1988
Dec. 31 To Consignment to 3,32,500 Dec. 31 By Consignment to
Tokyo A/c Sales Tokyo A/c (Expenses)
- Landing charges 450
- Storage 1500
- Insurance 1250
- Commission 49,875

Dec. 31 By Bank A/c (Amt. 2,79,425

remitted to Consignor)
3,32,500 3,32,500

Goods Sent on Consignment A/c

Date Particulars Rs. Date Particulars Rs.
1988 1988
Dec. 31 To Purchases A/c - 1,40,000 Jan. 1 By Consignment to 1,40,000
Transfer Tokyo A/c
1,40,000 1,40,000

Profit & Loss on Consignment A/c

Date Particulars Rs. Date Particulars Rs.
1988 1988
Dec. 31 To Profit & Loss A/c - 1,45,450 Dec. 31 By Consignment to 1,45,450
Transfer Tokyo A/c
1,45,450 1,45,450

Working Note 1: Valuation of Closing Stock

Particulars Rs. Rs.
Cost price of goods sent 1,40,000
(400 instruments @ Rs. 350 each)
Add: Consignors Expenses
Freight 1950
Cartage 150
Insurance 2500 4600
Add: Consignees Expenses
Landing Charges 450 450
1,45,050
Total Cost

Rs. 1, 45,050 x 50
Value of Closing Stock (at cost price) = 400 = Rs. 18,131.25

Market value = 50 instruments @ Rs. 250 each = Rs. 12,500, less commission @ 15%
(Rs. 1875) = Rs. 10,625. Therefore, the value of closing stock = Rs. 10,625
Loss of Goods on Consignment

It is possible that a portion of the consignment stock may be stolen or otherwise lost in
transit or in the consignees godown. The consignor will have to bear the loss, but not
the consignee. There may also be some inevitable normal losses. In accounting for
consignment, losses are classified as normal and abnormal. Therefore, in the books
of the consignor, accounting treatment for normal and abnormal losses are different.

Accounting for Normal Losses

Normal losses are inevitable or unavoidable. These may be due to natural causes like
breaking in bulk, evaporation, leakage, drying, etc. No effort can prevent these losses.

Normal loss is treated by ignoring this loss. It means that the value of remaining
stock absorbs this loss. Therefore, when there is no stock remaining unsold, there will
be no treatment for normal loss. But where there is some stock remaining unsold, the
value of the closing stock on consignment will be ascertained by applying the
following formulae:-

Value of Unsold Stock (in case of normal loss)

Total cost of goods received by the consignee x Unsold goods (in units)
Net Quantity received (after normal loss) by the
Consignee (in units)

Accounting for Abnormal Losses

Abnormal losses in consignment may arise owing to different reasons such as theft,
fire, etc. Again, these may occur either in transit or at the consignees place.
Abnormal losses should be distinguished from normal losses. Normal loss is
unavoidable but abnormal losses can be avoided. To ascertain the true profit on
consignment, abnormal losses should be accounted for in the Consignment account.
Therefore, the whole amount of abnormal loss should be charged to a special account
called as Abnormal Loss Account.

The Abnormal Loss Account has to be separately opened as a Ledger Account and the
following entries are to be posted in the books of the Consignor

1. For Recording of Abnormal Loss

Abnormal Loss A/c Dr

To Consignment to. A/c

(Being the value of abnormal loss transferred to Abnormal Loss account)

2. For Closing the Abnormal Loss account

(a) When the goods are not insured

Profit and Loss A/c Dr

To Abnormal Loss A/c

(Being the abnormal loss written-off)

(b) When the goods are fully insured

Insurance Claim A/c Dr

To Abnormal Loss A/c

(Being the insurance claim admitted by the insurance company)

(c) When the value of goods lost is more than the amount admitted by the insurance
company

Insurance Claim A/c Dr

Profit and Loss A/c Dr

To Abnormal Loss A/c

(Being the value of goods lost not covered by insurance claim, charged to Profit and
Loss Account)

3. When the actual claim is received from the Insurance Company

Bank A/c Dr

To Insurance Claim A/c

(Being the insurance claim received)

 Valuation of Abnormal Loss
Particulars Rs. Rs.
Cost price of goods sent XXX

Add: Non-Recurring expenses up to the point of loss XXX

(Consignors + Consignees)
XXX
Total cost of goods (just before loss)

Value of Abnormal Loss is calculated as follows:-

Total Cost x Abnormal loss of Quantity (in units)

Net Quantity (after normal loss)

Example 4:

Mr. Ramesh of Kolkata consigned 100 packets of medicine, each costing Rs. 500 to
his agent Md. Arif of Ahmedabad. He paid Rs. 1000 towards freight and insurance. 10
packets were destroyed in transit. The consignee took delivery of the remaining
packets and spent Rs. 500 as godown rent, Rs. 2000 as clearing charges and Rs. 500 as
selling expenses. The consignee could sell 80 packets @ Rs. 600 each.

You are required to calculate the value of goods lost in transit and the value of closing
stock

Solution:

Valuation of goods lost in transit (Abnormal Loss)

Particulars Amt. (Rs.)
Cost of 100 packets @ Rs. 500 each 50,000
Add: Non-recurring expenses up to the point of accident 1000

Cost of 100 packets (just before loss in transit) 51,000

51000 x 10
Value of Abnormal Loss (10 packets) = 100 = Rs. 5100
 Valuation of Closing Stock
Particulars Rs.
Cost price of goods sent (100 packets @ Rs. 500 each) 50,000

Add: Consignors Expenses

Freight & Insurance 1000
51000

Add: Consignees Expenses 2000

Clearing Charges 53,000

5100
Less: Value of Abnormal loss of goods

Total Cost of goods (90 packets) 47,900

47,900 x 10
Value of Closing Stock (10 packets) = 90 = Rs. 5322

Example 5:

A consigned to B 5000 Kgs of tea costing at Rs. 40 per Kg. A incurred Rs. 3000 on
freight and Rs. 2000 on insurance. After receiving the goods, B spent Rs. 3950 on
cartage, Rs. 500 as selling expenses and Rs. 500 on godown rent. B was allowed a
commission of 5% on sales. 3000 Kgs of tea were sold at Rs. 64 per Kg. 25 Kgs of tea
were lost due to breakage of a chest which was considered to be normal. 500 Kgs of
tea were lost by fire in the godown of the consignee. The insurance company admitted
the claim for Rs. 15000.

Prepare necessary Ledger accounts in the books of A.

Solution:
In the books of A (Consignor)

Consignment to B A/c
Date Particulars Rs. Date Particulars Rs.

To Goods sent on 2,00,000 By B A/c (Sales) 1,92,000

Consignment A/c [3000 Kgs @ Rs. 64 per
Kg]
To Cash A/c
- Freight 3000 By Abnormal Loss A/c 21000
- Insurance 2000 [Refer to Working
Note-1]
To B A/c (Expenses)
- Cartage 3950 By Stock on 61,950
- Selling expenses 500 Consignment A/c
- Godown rent 500 [Refer to Working
- Commission 9600 Note-2]

To Profit & Loss on 55,400

Consignment A/c -
Transfer

2,74,950 2,74,950

B A/c
Date Particulars Rs. Date Particulars Rs.
To Consignment to B By Consignment to B
A/c Sales 1,92,000 A/c (Expenses)
- Cartage 3950
- Selling expenses 500
- Godown rent 500
- Commission 9600

By Balance c/d 1,77,450

1,92,000 1,92,000
Goods Sent on Consignment A/c
Date Particulars Rs. Date Particulars Rs.
To Trading A/c - By Consignment to B
Transfer 2,00,000 A/c 2,00,000
2,00,000 2,00,000
Abnormal Loss A/c
Date Particulars Rs. Date Particulars Rs.
To Consignment to B 21000 By Insurance Co. A/c - 15000
A/c Claim

By Profit & Loss A/c 6000

21000 21000
Working Note 1

Valuation of Abnormal Loss

Particulars Amt. (Rs.)
Cost of 5000 Kgs @ Rs. 40 each 2,00,000
Add: Non-recurring expenses up to the point of accident
- Freight 3000
- Insurance 2000
- Cartage 3950

Total Cost of 4975 Kgs (i.e. 5000 Kgs Normal loss of 25 Kgs) 2,08,950

2, 08, 950 x 500

Value of Abnormal Loss (500 Kgs) = 4975 = Rs. 21000

Working Note 2

Valuation of Closing Stock

Particulars Rs.
Cost price of goods sent (5000 Kgs @ Rs. 40 each) 2,00,000

Add: Consignors Expenses

- Freight 3000
- Insurance 2000
2,05,000
Add: Consignees Expenses
Cartage 3950

2,08,950

Less: Value of Abnormal loss of goods (500 Kgs) 21000

1,87,950
Total Cost of 4475 Kgs
(i.e. 5000 Kgs Abnormal Loss of 500 Kgs - Normal loss of
25 Kgs)

1, 87, 950 x 1475

Value of Closing Stock (1475 Kgs) = 4475 = Rs. 61,950
Example 6:

Sri Mehta of Bombay consigns 1000 cases of goods costing Rs. 100 each to Sri
Sundaram of Madras. Sri Mehta pays the following expenses in connection with the
consignment: Carriage Rs. 1000, Freight Rs. 3000 and Loading Charges Rs. 1000.

Sri Sundaram sells 700 cases at Rs. 140 per case and incurs the following expenses:
Clearing charges Rs. 850, Warehousing & storage Rs. 1700, and Packing & selling
expenses Rs. 600.

It was found that 50 cases have been lost in transit and 100 cases are still in transit. Sri
Sundaram is entitled to receive a commission of 10% on gross sales.

Prepare Consignment Account and Sundaram Account in the books of Sri Mehta

Solution:
In the books of Sri Mehta (Consignor)

Consignment to Sundaram A/c

Date Particulars Rs. Date Particulars Rs.

To Goods sent on 1,00,000 By Sundaram A/c 98000

Consignment A/c (Sales)
[700 cases @ Rs. 140
To Cash A/c per case]
- Freight 3000
- Carriage 1000 By Abnormal Loss A/c 5250
- Loading charges 1000 [Refer to Working
Note-1]
To B A/c (Expenses)
- Clearing charge 850 By Stock in Transit A/c 10,500
- Storage charges 1700 [Refer to Working
- Packing charges 600 Note-2]
- Commission 9800
By Stock on 15,900
To Profit & Loss on 11,700 Consignment A/c
Consignment A/c - [Refer to Working
Transfer Note-3]

1,29,650 1,29,650
 Sundaram A/c
Date Particulars Rs. Date Particulars Rs.
To Consignment to By Consignment to
Sundaram A/c Sales 98000 Sundaram A/c
(Expenses)
- Clearing charge 850
- Storage charges 1700
- Packing charges 600
- Commission 9800

By Balance c/d 85,050

98000 98000

Working Note 1

Valuation of Abnormal Loss

Particulars Amt. (Rs.)
Cost of 1000 cases @ Rs. 100 each 1,00,000
Add: Non-recurring expenses up to the point of accident
- Freight 3000
- Carriage 1000
- Loading charges 1000

Total Cost of 1000 cases 1,05,000

1, 05, 000 x 50
Value of Abnormal Loss (50 cases) = 1000 = Rs. 5250

Working Note 2

Valuation of Stock in Transit

Particulars Amt. (Rs.)
Cost of 1000 cases @ Rs. 100 each 1,00,000
Add: Consignors expenses
- Freight 3000
- Carriage 1000
- Loading charges 1000

Total Cost of 1000 cases 1,05,000

1, 05, 000 x 100

Value of Stock in Transit (100 cases) = 1000 = Rs. 10,500
Working Note 3

Valuation of Closing Stock

Particulars Rs.
Cost price of goods sent (1000 cases @ Rs. 100 each) 1,00,000

Add: Consignors Expenses

- Freight 3000
- Carriage 1000
- Loading charges 1000

1,05,000
Add: Consignees Expenses
Clearing charges 850

1,05,850

Less: Value of Abnormal loss of goods (50 cases) 5250

1,00,600

Less: Value of Stock in Transit (100 cases) 10,500

Total Cost of 850 cases 90,100

(i.e. 1000 cases Abnormal Loss of 50 cases Stock in
Transit of 100 cases)

90, 100 x 150

Value of Closing Stock (150 cases) = 850 = Rs. 15,900
Credit Sales and Del credere Commission

It is not necessary that all the goods are to be sold by the consignment in cash. He may
require to sell some part of the goods on credit. When goods are sold on credit, the
problem of bad debts may arise.

Del credere Commission is an additional commission paid to a consignee who

guarantees the payment in case of a credit sale. Where consignee gets del credere
commission, he indemnifies the consignor for all bad debts. To the consignor, it is a
form of credit insurance.

Points to be noted

1. The Consignor will bear the bad debts loss if no del credere commission is given
to the consignee

2. The Consignee will bear the bad debts loss if del credere commission is given to
him.

3. Like ordinary commission, del credere commission is also paid at a predetermined

percentage on the Gross Sale proceeds.
A. Accounting Entries for Credit Sales where No Del credere commission is given

In the books of Consignor In the books of Consignee

1. For Credit Sales 1. For Credit Sales
Consignment Debtors A/c Dr
To Consignment to.A/c No Entry
(Being goods sold on credit)

2. For Collection from Debtors 2. For Collection from Debtors

Cash or Bank A/c Dr (coll. by consignor) Cash or Bank A/c Dr
Consignee A/c Dr (coll. by consignee) To Consignor A/c
To Consignment Debtors A/c (Being cash collected from Consignment
(Being cash collected from Debtors) Debtors)

3. For recording of Bad Debts 3. For recording of Bad Debts

Consignment to. A/c Dr
To Consignment Debtors A/c (Bad Debts) No Entry
(Being bad debts written off)
4. Extra Ledger Accounts Required 4. Extra Ledger Accounts Required

Consignment Debtors Account Not Applicable

B. Accounting Entries for Credit Sales where Del credere commission is given

In the books of Consignor In the books of Consignee

1. For Credit Sales 1. For Credit Sales
Consignee A/c Dr Consignment Debtors A/c Dr
To Consignment to.A/c To Consignor A/c
(Being goods sold on credit by consignee) (Being goods sold on credit)

2. For Collection from Debtors 2. For Collection from Debtors

Cash or Bank A/c Dr
No Entry To Consignment Debtors A/c
(Being cash collected from Consignment
Debtors)

3. For recording of Bad Debts 3. For recording of Bad Debts

(a) Bad Debts A/c Dr
No Entry To Consignment Debtors A/c
(Being the bad-debt written off)
(b) Commission Received A/c Dr
To Bad Debts A/c
(Being the bad debts adjusted against
commission received)
(c) Commission Received A/c Dr
To Profit and Loss A/c
(Being commission transferred to Profit
and Loss Account)

4. For payment of Del credere 4. For payment of Del credere

commission commission
Consignment toA/c Dr Consignor A/c Dr
To Consignee A/c To Commission Received A/c
(Being del credere commission paid to (Being del credere commission received
consignee) from the consignor)

4. Extra Ledger Accounts Required 4. Extra Ledger Accounts Required

Consignment Debtors Account
Not Applicable Commission Received Account
Example 7:

On 1st November, 1989, C of Calcutta sends goods costing Rs. 1, 00,000 to D of Delhi
on consignment basis. C paid Rs. 5000 as railway freight and Rs. 2000 as insurance.

On 31st December, 1989 an Account Sales was received from D disclosing that the
entire quantity of goods were sold for Rs. 1,50,000 out of which, Rs. 30,000 was
sold on credit. A customer who purchased goods for Rs. 5000 failed to pay and the
debt proved bad. All other debts were collected by D in full. As per agreement, D is
allowed a commission @ 10% on sales. D sends the amount due to C by a cheque.

(a) Prepare necessary Ledger Accounts in the books of C, and Cs Account in the
books of D.

(b) Will your answer be different, if in the above illustration, the consignee is given a
Del credere commission @ 5% on sales (in addition to ordinary commission) other
information remaining the same?

Assume that the books of accounts are closed on 31st December every year.
 Solution (a): Accounting Entries for Credit Sales where No Del credere
commission is given to consignee

In the books of C (consignor)

Consignment to D A/c
Date Particulars Rs. Date Particulars Rs.
1989 1989
Nov. 1 To Goods sent on 1,00,000 Dec. 31 By D A/c (Cash Sales) 1,20,000
Consignment A/c

Nov. 1 To Cash A/c

- Railway Freight 5000 Dec. 31 By Consignment
- Insurance 2000 Debtors A/c 30,000
[Credit Sales]
Dec. 31 To D A/c
- Commission 15000
@10%

To Consignment Debtors 5000

A/c - Bad Debts

To Profit & Loss on 23000

Consignment A/c -
Transfer

1,50,000 1,50,000

D A/c
Date Particulars Rs. Date Particulars Rs.
1989 1988
Dec. 31 To Consignment to D 1,20,000 Dec. 31 By Consignment to D 15000
A/c Cash Sales A/c - Commission

Dec. 31 To Consignment 25,000 Dec. 31 By Bank A/c (Amt. 1,30,000

Debtors A/c Credit remitted to Consignor)
Sales
1,45,000 1,45,000

Consignment Debtors A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Consignment to D 30,000 Dec. 31 By D A/c 25000
A/c (Cash Collected from
Debtors)

Dec. 31 By Consignment to D 5000

A/c Bad Debts
30,000 30,000
 Goods Sent on Consignment A/c
Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Purchases A/c - 1,00,000 Nov. 1 By Consignment to D 1,00,000
Transfer A/c
1,00,000 1,00,000

In the books of D (consignee)

C A/c
Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Commission 15000 Dec. 31 By Bank A/c Cash 1,20,000
Received A/c Sales

Dec. 31 To Bank A/c 1,30,000 Dec. 31 By Bank A/c - 25000

- (Amt. remitted by (Collection from
the consignee to Debtors)
Consignor)
1,45,000 1,45,000

Commission Received A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Profit and Loss 15000 Dec. 31 By C A/c 15000
A/c - Transfer

30,000 30,000
 Solution (b): Accounting Entries for Credit Sales where Del credere commission
is given to the consignee
In the books of C (consignor)

Consignment to D A/c
Date Particulars Rs. Date Particulars Rs.
1989 1989
Nov. 1 To Goods sent on 1,00,000 Dec. 31 By D A/c - 1,50,000
Consignment A/c - Cash Sales (1,20,000)
- Credit Sales (30,000)
Nov. 1 To Cash A/c
- Railway Freight 5000
- Insurance 2000

Dec. 31 To D A/c
- Commission 15000
@10%
- Del credere
Commission 7500
@ 5%

To Profit & Loss on 20,500

Consignment A/c -
Transfer

1,50,000 1,50,000

D A/c
Date Particulars Rs. Date Particulars Rs.
1989 1988
Dec. 31 To Consignment to D 1,50,000 Dec. 31 By Consignment to D
A/c A/c
- Cash Sale (1,20,000) - Commission 15000
- Credit Sales (30,000) @10%
- Del credere
Commission @ 7500
5%

Dec. 31 By Bank A/c (Amt. 1,27,500

remitted to Consignor)
1,50,000 1,50,000

Goods Sent on Consignment A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Purchases A/c - 1,00,000 Nov. 1 By Consignment to D 1,00,000
Transfer A/c
1,00,000 1,00,000
 In the books of D (consignee)

C A/c
Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Commission Dec. 31 By Bank A/c Cash 1,20,000
Received A/c Sales
- Commission 15000
@10% Dec. 31 By Consignment 30,000
- Del credere Debtors A/c (credit
Commission @ 7500 sales)
5%

Dec. 31 To Bank A/c 1,27,500

- (Amt. remitted by the
Consignee to
Consignor)
1,50,000 1,50,000

Consignment Debtors A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To C A/c 30,000 Dec. 31 By Bank A/c 25000
(Cash Collected from
Debtors)

Dec. 31 By Bad Debts A/c 5000

30,000 30,000

Commission Received A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Bad Debts A/c 5000 Dec. 31 By C A/c 22,500

To Profit and Loss 17,500

A/c Transfer

22,500 22,500
 Example 8:

Karnath sold goods on behalf of Vijay Sales Corporation on consignment basis. On

January 1, 1989, he had with him stock of Rs. 20,000 on consignment.

Karnath had instruction to sell the goods at cost plus 25% and was entitled to a
commission of 4% on sales, in addition to 1% Del credere commission on total sales
for guaranteeing collection of all the sale proceeds.

During the year ended 31st December, 1989, cash sales were Rs. 1,20,000; credit sales
Rs. 1,05,000 and Karnaths expenses relating to the consignment Rs. 3000 being
salaries and insurance. Bad Debts were Rs. 3000 and goods sent on consignment Rs.
2, 00,000.

From the above information, prepare Consignment Account in the books of Vijay
Sales Corporation; and important ledger accounts in the books of Karnath. Assume
that the books of accounts are closed on 31st December every year.

Solution:

In the books of Vijay Sales Corporation (consignor)

Consignment to Karnath A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Jan. 1 To Stock on 20,000 Dec. 31 By D A/c - 2,25,000
Consignment A/c - Cash Sales (1,20,000)
(opening Stock) - Credit Sales (1,05,000)

Jan. 1 To Goods sent on 2,00,000

Consignment A/c Dec. 31 By Stock on 40,000
Consignment A/c
Dec. 31 To Karnath A/c [Refer to Working
- Salaries & Ins. 3000 Note-1]
- Ordinary 9000
Commission
- Del credere 2250
Commission

Dec. 31 To Profit & Loss on 30,750

Consignment A/c -
Transfer

2,65,000 2,65,000
Working Note 1: Valuation of Closing Stock

Particulars Rs. Rs.

Opening Stock of goods 20,000

Add: Cost price of goods sent 2,00,000

Add: Consignors Expenses Nil

Add: Consignees Expenses Nil

2,20,000

Less: Cost of Goods Sold (80% on 2,25,000) 1,80,000

Stock on Consignment at the end 40,000

In the books of Karnath (consignee)

Vijay Sales Corporation A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Commission Dec. 31 By Bank A/c Cash 1,20,000
Received A/c Sales
- Commission 9000
- Del credere 2250 Dec. 31 By Consignment 1,05,000
Commission Debtors A/c - (Credit
Sales)
Dec. 31 To Bank A/c 3000
expenses

Dec. 31 To Balance c/d 1,10,750

2,25,000 2,25,000

Consignment Debtors A/c

Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Vijay Sales 1,05,000 Dec. 31 By Bank A/c 1,02,000
Corporation A/c (Cash Collected from
Debtors)

Dec. 31 By Bad Debts A/c 3000

1,05,000 1,05,000
 Commission Received A/c
Date Particulars Rs. Date Particulars Rs.
1989 1989
Dec. 31 To Bad Debts A/c 3000 Dec. 31 By Vijay Sales 11,250
Corporation A/c
To Profit and Loss 8250
A/c Transfer

11,250 11,250
Example 9:

On 1st July, 1984 Sengupta of Calcutta sent 150 cases of goods at a cost of Rs. 750 per
case to Kapoor of Bombay on consignment basis and paid Rs. 1900 for insurance
premium, Rs. 3500 for freight and Rs. 2600 for dock charges. On arrival of the goods,
Kapoor sent a bank-draft for Rs. 10,000 to Sengupta on 30th July, 1984 and paid Rs.
2500 for clearing charges, Rs. 870 for Cartage and Rs. 750 for godown rent. 5 cases
were damaged in transit and a sum of Rs. 3500 was realized by way of compensation
from the insurance company.

Up to 31st December, 1984, 100 cases were sold for Rs. 1, 05,000 incurring a bad debt
of Rs. 1150. Kapoor was entitled to a commission of 5% of the gross sales with
further 2% as Del credere commission. The amount due to Sengupta up to 31st
December, 1984 was remitted by a bank-draft.

Show (a) Consignment to Bombay A/c, (b) Kapoor A/c, and (c) Abnormal Loss A/c in
the books of Sengupta. Assume that the books of accounts are closed on 31st
December every year.
 In the books of Sengupta (Consignor)

Consignment to Bombay A/c

Date Particulars Rs. Date Particulars Rs.
1984 1984
July 1. To Goods sent on 1,12,500 Dec. 31 By Kapoor A/c (Sales) 1,05,000
Consignment A/c

July 1. To Cash A/c Dec. 31 By Abnormal Loss A/c 4017

- Freight 3500 [Refer to Working
- Insurance 1900 Note-1]
- Dock charges 2600
Dec. 31 By Stock on 37,196
To Kapoor A/c - Consignment A/c
Dec. 31 (Expenses) [Refer to Working
- Cartage 870 Note-2]
- Clearing charge 2500
- Godown rent 750
- Ordinary
Commission 5250
- Del credere
Commission 2100

To Profit & Loss on 14,243

Consignment A/c -
Transfer
1,46,213 1,46,213

Kapoor A/c
Date Particulars Rs. Date Particulars Rs.
1984 1984
Dec. 31 To Consignment to B 1,05,000 July 30 By Bank A/c Draft 10,000
A/c Sales given in advance

Dec. 31 By Consignment to
Bombay A/c
(Expenses)
- Cartage 870
- Clearing charge 2500
- Godown rent 750
- Ordinary
Commission 5250
- Del credere
Commission 2100

Dec. 31 By Bank A/c (Final 83,530

Payment remitted to
Consignor)
1,05,000 1,05,000
 Abnormal Loss A/c
Date Particulars Rs. Date Particulars Rs.
1984 1984
Dec. 31 To Consignment to 4017 Dec. 31 By Insurance Co. A/c - 3500
Bombay A/c Claim

Dec. 31 By Profit & Loss A/c 517

4017 4017

Working Note 1
Valuation of Abnormal Loss
Particulars Amt. (Rs.)
Cost of goods sent (150 cases @ Rs. 750 each) 1,12,500
Add: Non-recurring expenses up to the point of accident
- Freight 3500
- Insurance 1900
- Dock charges 2600

Total Cost of 150 cases 1,20,500

1, 20, 500 x 5
Value of Abnormal Loss (5 cases) = 150 = Rs. 4017

Working Note 2
Valuation of Closing Stock
Particulars Rs.
Cost price of goods sent (150 cases @ Rs. 750 each) 1,12,500

Add: Consignors Expenses

- Freight 3500
- Insurance 1900
- Dock charges 2600

Add: Consignees Expenses

- Cartage 870
- Clearing charge 2500
1,23,870
Less: Value of Abnormal loss of goods (5 cases) 4017

Total Cost of 145 cases 1,19,853

(i.e. 150 cases Abnormal Loss of 5 cases No Normal
loss)

1, 19, 853 x 45
Value of Closing Stock (45 cases) = 145 = Rs. 37,196
Invoice Price Method

Sometimes, the consignor may prefer to send the goods to the consignee at a higher
price than the cost price and accordingly prepares the Proforma Invoice by adding
some profit on cost or on sales.

For example, say C of Calcutta consigned 100 cases of goods to D of Delhi on 1st
January, 1990. The cost per case is Rs. 500. The Proforma Invoice was made to show
a 20% profit on cost.

Here, Proforma Invoice will be prepared @ Rs. 600 (Rs. 500 + 20% of 500) per case
and the Consignment Account will be debited with Rs. 60,000 though the actual cost
of goods is Rs. 50,000.

The goods are charged to consignment not at cost but at a higher price with an
objective:-

(a) To keep the profit on consignment secret.

(b) To give incentive to the consignee to realize the highest possible price.

(c) To make him charge a uniform price.

INVOICE PRICE METHOD

The method of preparation of Accounts are the same as in the Cost Price method,
except for a few adjustments which are given below:

A. Additional Journal Entries in the books of the Consignor

1. For sending goods to the consignee

Consignment to..A/c Dr (Invoice price)

To Goods sent on consignment A/c (Invoice price)

(Being goods sent on consignment to..)

2. For adjusting the value of goods sent on consignment

Goods sent on Consignment A/c Dr (Difference between Invoice Value and Cost)

To Consignment to.A/c (Difference between Invoice Value and Cost)

(Being loading on goods sent adjusted)

3. For Recording of Abnormal Loss

Abnormal Loss A/c Dr (Invoice price)

To Consignment to. A/c (Invoice price)

(Being the invoice price of goods lost transferred to Abnormal Loss account)

4. For Closing the Abnormal Loss account

Insurance Claim A/c Dr (Claim Admitted)

Consignment to.A/c Dr (Loading on Goods lost)

Profit and Loss A/c Dr (Remaining Balance)

To Abnormal Loss A/c

(Being the abnormal loss written-off)

5. For recording of Closing Stock

Stock on Consignment A/c Dr (Proportionate Invoice Value + Non-recurring exp.)

To Consignment toA/c

(Being the value of goods unsold at Invoice price)

6. For adjusting the value of Closing Stock

Consignment to..A/c Dr (Total loading/Total Qty. x Unsold Qty.)

To Stock Reserve A/c

(Being loading on unsold goods adjusted)

Note:-

(a) All other entries relating to Consignment in the books of Consignor will remain
unchanged under both the methods.

(b) Journal Entries in the books of the Consignee under Invoice Price method would
also remain unchanged.

(c) In the Balance Sheet of the Consignor, Stock on Consignment should be shown on
the Assets side and Stock Reserve should be shown by way of deduction from Stock
on Consignment.
(d) At the beginning of the next accounting year, the balance of the Stock on
Consignment Account will be transferred to the Debit side of the Consignment
Account, and the Stock Reserve Account will be transferred to the Credit side of the
Consignment Account.

Example 10:

On 1st January, 1990 Seth Brothers of Calcutta consigned 200 cycles to Panigrahi &
Sons of Paradeep. Each cycle costing Rs. 800. The goods were charged at a proforma
invoice price to show a 25% profit on cost. On the same date, the consignor paid Rs.
4000 as freight and insurance.

On 30th April, the consignee sent a bank draft for Rs. 1, 00,000 to the consignor as
advance. On 31st December, 1990 the consignee sent an Account Sales informing that
180 cycles have been sold Rs. 1200 each. They have incurred the following expenses
in respect of the consignment: (a) Unloading charges Rs. 1000, (b) Cycle fitting
charges Rs. 2000, and (c) Godown rent Rs. 4200.

With the Account Sales, the consignee sent a remittance for the balance due to the
consignor after deducting commission of 5% on gross sale proceeds.

You are required to show the necessary Ledger Accounts in the books of Seth Bros.,
and Seth Bros. Account in the books of Panigrahi & Sons. Assume that the books of
accounts are closed on 31st December every year.
 In the books of Seth Brothers (Consignor)
Consignment to Paradeep A/c
Date Particulars Rs. Date Particulars Rs.
1990 1990
Jan 1. To Goods sent on 2,00,000 Dec. 31 By Panigrahi & Sons 2,16,000
Consignment A/c A/c (Sale proceeds)

July 1. To Bank A/c Dec. 31 By Goods sent on 40,000

- Freight & 4000 Consignment A/c
Insurance (Loading on Goods
sent) - [Refer to
Dec. 31 To Panigrahi & Sons Working Note-1]
A/c - (Expenses)
- Unloading 1000 Dec. 31 By Stock on 20,700
charges Consignment A/c
- Cycle Fitting 2000 [Refer to Working
charges Note-2]
- Godown rent 4200
- Commission @ 10,800
5%

Dec. 31 To Stock Reserve A/c 4000

(Loading on Unsold
stock)

To Profit & Loss on 50,700

Consignment A/c -
Transfer
2,76,700 2,76,700
Panigrahi & Sons A/c
Date Particulars Rs. Date Particulars Rs.
1990 2,16,000 1990
Dec. 31 To Consignment to B Apr. 30 By Bank A/c Draft 1,00,000
A/c Sales given in advance

Dec. 31 By Consignment to
Paradeep A/c
(Expenses)
- Unloading 1000
charges
- Cycle Fitting 2000
charges
- Godown rent 4200
- Commission @ 10,800
5%
Dec. 31 By Bank A/c (Final 98,000
Payment remitted to
Consignor)
2,16,000 2,16,000
 Goods Sent on Consignment A/c
Date Particulars Rs. Date Particulars Rs.
1990 1990
Dec. 31 To Consignment to 40,000 Jan. 1 By Consignment to 2,00,000
Paradeep A/c Paradeep A/c
(Loading on goods
sent)

Dec. 31 To Trading A/c - 1,60,000

Transfer
2,00,000 2,00,000

In the books of Panigrahi & Sons (Consignee)

Seth Brothers A/c

Date Particulars Rs. Date Particulars Rs.
1990 1990
Apr. 30 To Bank A/c 1,00,000 Apr. 30 By Bank A/c Sales 2,16,000
Advance

Dec. 31 To Bank A/c -

(Expenses)
- Unloading 1000
charges
- Cycle Fitting 2000
charges
- Godown rent 4200
- Commission 10,800
Received @ 5%

Dec. 31 To Bank A/c - (Final 98,000

Payment)
2,16,000 2,16,000

Working Note -1

Invoice price = cost price + 25% profit on cost = Rs. 800 + Rs. 200 = Rs. 1000

Loading per bicycle = Invoice Price Cost Price = Rs. (1000 800) = Rs. 200

Total Loading for 200 bicycles sent = Rs. (200 x 200) = Rs.40,000
Working Note -2

Valuation of Closing Stock (At Invoice Price)

Particulars Rs.
Invoice price of goods sent 2,00,000
(200 cycles @ Rs. 1000 each)

Add: Consignors Expenses

Freight & Insurance 4000

Add: Consignees Expenses

Unloading Charges 1000
Cycle Fitting Charges 2000

Value of 200 Cycles (At Invoice Price) 2,07,000

Rs. 2, 07,000 x 20
Value of Closing Stock (20 cycles) = 200 = Rs. 20,700

Loading on Closing Stock of 20 cycles = (Rs.40,000/200) x 20 = Rs. 4000

Example 11:

Lila & Co. of Calcutta sent on 10th October, 1986 a consignment of 150 fans costing
Rs. 300 each to Shila & Co. of Bombay. The invoice price was stated at Rs. 350 each.
Lila & Co. paid thereon Rs. 750 for railway freight, Rs. 200 for cartage and Rs. 500
for insurance.

On the same date, the consignor also drew a 3-moths bill for Rs. 10,000 which was
accepted by the consignee, by way of advance remittance against the consignment. 25
fans were stolen in transit and a claim of Rs. 7500 was accepted by the insurance
company.

On 28th February, 1987 Shila & Co. sent an Account Sales reporting sale of 100 fans
on credit for Rs. 37,500 out of which Rs. 500 was unrealizable. Shila & Co. was
entitled to a commission of 10% on sales and spent Rs. 250 as Godown rent, Rs. 500
as advertisement cost and Rs. 300 as cartage.

Prepare the necessary Ledger Accounts in the books of Lila & Co. of Calcutta
 In the books of Lila & Co. (Consignor)
Consignment to Bombay A/c
Date Particulars Rs. Date Particulars Rs.
1986 1986
Oct. 10 To Goods sent on 52,500 Feb. 28 By Consignment 37,500
Consignment A/c Debtors A/c - (Sales
proceeds)
Oct. 10 To Bank A/c
- Railway Freight 750 By Goods sent on 7500
- Cartage 200 Consignment A/c
- Insurance 500 (Loading on Goods
sent) - [Refer to
Feb. 28 To Shila & Co. A/c - Working Note-1]
(Expenses)
- Cartage 300 By Abnormal Loss A/c 8992
- Advertisement 500 [Refer to Working
- Godown rent 250 Note-2]
- Commission @ 3750
10% By Stock on 9052
Consignment A/c
To Consignment Debtors 500 [Refer to Working
A/c Bad Debts Note-3]

To Stock Reserve A/c 1250

(Loading on Unsold
stock)

To Abnormal Loss A/c - 1250

Loading

To Profit & Loss on 1294

Consignment A/c -
Transfer
63,044 63,044
 Shila & Co. A/c
Date Particulars Rs. Date Particulars Rs.
1986 1986
Feb. 28 To Consignment 37,000 Feb. 28 By Consignment to
Debtors A/c Credit Bombay A/c
Sales - Cartage 300
- Advertisement 500
- Godown rent 250
- Commission @ 3750
10%

By Bills Receivable A/c 10,000

By Bank A/c (Amt. 22,200

remitted to Consignor)
37,000 37,000

Consignment Debtors A/c

Date Particulars Rs. Date Particulars Rs.
1986 1986
Feb. 28 To Consignment to 37,500 Feb. 28 By Shila & Co. A/c 37000
Bombay A/c (Cash Collected from
Debtors)

Feb. 28 By Consignment to 500

Bombay A/c Bad
Debts
30,000 30,000

Abnormal Loss A/c

Date Particulars Rs. Date Particulars Rs.
1986 1986
Feb. 28 To Consignment to 8992 Feb. 28 By Consignment to 1250
Bombay A/c Bombay A/c

By Insurance Co. A/c - 7500

Claim

By Profit & Loss A/c - 242

Transfer
8992 8992
 Goods Sent on Consignment A/c
Date Particulars Rs. Date Particulars Rs.
1986 1986
Feb. 28 To Consignment to 7500 Oct. 10 By Consignment to 52,500
Bombay A/c Bombay A/c
(Loading on goods
sent)

To Trading A/c - 45000

Transfer
52,500 52,500

Working Note -1

Invoice Price = Rs. 350; Cost Price = Rs. 300

Loading per fan = Invoice Price Cost Price = Rs. (350 300) = Rs. 50

Total Loading for 150 fans sent = Rs. (150 x 50) = Rs.7500

Working Note 2

Valuation of Abnormal Loss (At Invoice Price)

Particulars Amt. (Rs.)
Invoice price of 150 fans @ Rs. 350 each 52,500
Add: Non-recurring expenses up to the point of loss
- Railway Freight 750
- Cartage 200
- Insurance 500

Total Value of 150 fans (At Invoice Price) 53,950

53, 950 x 25
Value of Abnormal Loss (25 fans) = 150 = Rs. 8992

Loading on Abnormal Loss (25 fans) = 25 x (350 300) = Rs. 1250

Working Note -3

Valuation of Closing Stock (At Invoice Price)

Particulars Rs.
Invoice price of goods sent 52,500
(150 fans @ Rs. 350 each)

Add: Consignors Expenses

- Railway Freight 750
- Cartage 200
- Insurance 500

Add: Consignees Expenses

- Cartage 300

54,250

Less: Abnormal Loss at Invoice Price (25 fans) 8992

Value of 125 fans (At Invoice Price) 45,258

Rs. 45,258 x 25
Value of Closing Stock (25 fans) = 125 = Rs. 9052

Loading on Closing Stock of 25 fans = 25 x 50 = Rs. 1250