Consignment
The method of selling goods through an agent in a foreign country or in a
distant place of the same country on commission and at the risk of the owner
is termed as “Consignment Business”.
The Businessman who sends goods to the agent is called a Consignor and
the person to whom goods are sent is known as a Consignee.
There is a Principal-Agent Relation between consignor and consignee.
The remuneration paid to the consignee for the consignment business is
known as Commission.
Consignment is not a sale, as the agent does not buy the goods i.e. Ownership
is not transferred.
………………
Features of Consignment
1) The goods are sold at the risk of the consignor only.
2) Consignee is concerned with his commission only.
3) If the goods are damaged or destroyed, the consignee is not responsible
in any way.
4) The consignee is entitled to recover all expenses that he incurs in
connection to consignment.
5) The relation between two parties is that of principal and an agent.
Compiled by: Prof. Rajmohan Nair
JG Commerce College
Consignment
Difference between Consignment and Sale
Sr No. Consignment Sale
1) Ownership In case of the consignment, the In case of Sale the ownership is
ownership of goods remains with transferred immediately. i.e
the consignor. The consignee does ownership is transferred from
not become the owner. seller to buyer.
2) Relationship The relationship between the In case of a sale, I,e credit sale
parties to contract is of principal then there establish Debtor and
and agent. Creditor Relationship.
3) Expenses All Expenses of consignment are to In case of sale the expenses are to
be borne by the consignor only. be borne by the buyer.
4) Return of Goods The consignee can return the A seller is not bound to accept the
goods lying unsold with him. return of goods in case of a sale.
5) Loss or Gain The loss or damage of goods must In sale, the profit or loss after sale
be borne by the consignor. belongs the buyer only.
Similarly the gain accruing to the
goods also belongs to the
consignor.
6) Recovery The consignor can get the goods In sale, as the ownership has
back from the consignee at any passed from the seller to the
time. buyer, the seller cannot obtain
goods back for non payment of the
price. He can only sue the buyer
for recovering the price of goods
sold.
NORMAL LOSS
If some loss is unavoidable, it would be spread over the entire consignment
while valuing inventories. The total cost plus expenses incurred should be
divided by the quantity available after the normal loss to ascertain the cost
per unit. Suppose 10,000 kg of apples are consigned to a wholesaler, the
cost being `30 per kg, plus ` 40,000 of freight. It is concluded that a loss of
15% is unavoidable. The cost per kg will be
3,40,000/8,500 or 40. If the unsold inventory is 1,000 kg its value will be
40,000
Accordingly, no entry is recorded for normal loss and same is considered as
expense which is considered for valuation of remaining inventory.
ABNORMAL LOSS
If any accidental or unnecessary loss occurs, the proper thing to do is to find
out the cost of the goods thus lost and then to credit the Consignment
Compiled by: Prof. Rajmohan Nair
JG Commerce College
Consignment
Account and debit the Profit and Loss Account – this will enable the
consignor to know what profit would have been earned had the loss not
taken place.
Suppose 1,000 sewing machines costing 2,500 each are sent on
consignment basis and 10,000 are spent on freight etc. 20 machines are
damaged beyond repair. The amount of loss will be:
Cost = 20 × 2500 ` 50,000
Expenses = (20×10,000)/1000 200
50,200
This amount should be credited to the Consignment Account and debited to the
P&L A/c. If any amount, say,
40,000 is received from the insurers, then debit to the P&L A/c will be only
10,200. But the credit to the Consignment Account will still be 50,200.
40,000 will have been debited to the Bank Account.
Students shall note that abnormal loss is valued just like inventories in
hand.
Students should be careful while valuing goods lost in transit and goods
lost in consignee’s godown. Both are abnormal loss but in case of former
consignee’s non-recurring expenses are not to be included whereas it is to be
included in latter case.
Types of Commissions
Ordinary Commission
The term commission simply denotes ordinary commission. It is based on fixed
percentage of the gross sales proceeds made by the consignee. It is given by the
consignor regardless of whether the consignee is making credit sales or not.
This type of commission does not give any protection to the consignor from
bad debts and is provided on total sales.
Del-credere Commission
To increase the sale and to encourage the consignee to make credit sales, the
consignor provides an additional commission generally known as del-credere
commission. This additional commission when provided to the consignee
gives a protection to the consignor against bad debts. In other words, after
providing the del-credere commission, bad debts are no more the loss of the
consignor. It is calculated on total sales unless there is any agreement
between the consignor and the consignee to provide it on credit sales only.
Over-riding Commission
It is an extra commission allowed by the consignor to the consignee to
promote sales at higher price then specified or to encourage the consignee
to put hard work in introducing new product in the market. Depending on
Compiled by: Prof. Rajmohan Nair
JG Commerce College
Consignment
the agreement it is calculated on total sales or on the difference between
actual sales and sales at invoice price or any specified price. In order to
encourage the consignee to earn higher margins, it can also be in the form
of share of additional profits made by consignee on sale of goods.
.
ACCOUNT SALES
An account sale is the periodical summary statement sent by the
consignee to the consignor. It contains details regarding –
(a) sales made,
(b) expenses incurred on behalf of the consignor,
(c) commission earned,
(d) unsold inventories left with the consignee,
(e) Advance payment or security deposited with the consignor and the extent
to which it has been adjusted.
(f) Balance payment due or remitted.
Compiled by: Prof. Rajmohan Nair
JG Commerce College
