CONSIGNMENT ACCOUNT

Consignment Account relates to accounts dealing with such business where one person sends
goods to another person on the basis that such goods will be sold on behalf of and at the risk of
the former.
Consignment
Where a trader, i.e. the consignor, sends goods to his agent, i.e. the consignee to sell and collect
the money from customers for him, the goods are said to be sent on consignment. Goods are
usually sent on consignment to an agent in a different country. Goods sent on consignment
belong to the sender, i.e. the consignor, until that are sold.
A consignor
A consignor is a trader who (as principal) sends goods to another (the agent) to sell them on his
behalf for a reward, that is for commission.
A consignee
A consignee is the agent to whom goods are sent on consignment. His job n is to sell the goods,
collect the money from customers and to remit the money to the consignor after deducting an
agreed remuneration called commission.
Commission
Commission is the remuneration paid by the consignor to the consignee for the services rendered
to the former for selling the consigned goods. Three types of commission can be provided by the
consignor to the consignee, as per the agreement, either simultaneously or in isolation. They are:
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 (i.e. bad debts is no more the loss of the consignor. lt 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: lt 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 the agreement it is calculated on total sales
or on the difference between actual sales and sales at invoice price or any specified price.
An account sale
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 stock 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. lt is a summary statement and is different from sales
account.
Pro Forma invoice
Since the goods on consignment are not deemed to have been sold to the agent, he is not
invoiced for them. Instead, a pro forma invoice is used for a form’s sake when the goods are
sent.
A proforma is not a charge but only used to provide information on the goods and to indicate the
price at which the consignee is expected to sell them.

Valuation of Inventory
The principle is that Inventory should be valued at cost or net realizable value whichever is
lower, the same principle as is practiced for preparing final accounts. ln the case of consignment,
cost means not only the cost of the goods as such to the consignor but also all expenses incurred
till the goods reach the premises of the consignee. Such expenses Include packaging, freight,
cartage, insurance intransit, etc. But expenses incurred after the goods have reached the
consignee’s (such as rent, insurance, delivery charges) are not treated as part of the cost of
purchase for valuing stock on hand.
= Consignor’s Cost +Consignee’s Expenses
Consignor’s cost
= Total consignor’s cost × Units of closing Inventory
Total units of goods sent on consignment

= [Cost of goods on consignment + Consignor’s expenses] × Units of closing Inventory

Consignee’s expense
= Total consignees expenses (excluding marketing expenses) × Units of closing Inventory

Total units of goods RECEIVED by consignee (after normal loss)

Illustration 1

CHICASON of Tinka Irelan LAGOS on 1st June 2023, consigned 200 cases of goods to his agent
Mr. I.K. of Bauchi state at a pro-forma invoice price of N8.000 per case and draw a bill of
exchange at 3month for 60% of the value of the goods. Chicason incurred haulage charges of
N120,000.

On 30th September, Chicason received an accounts sales from I.K. showing 175 cases had been
sold at N10,000 each and 25 at N11,000 each. The agent sent a bank draft for the balance due to
the consignor after deducting the following;

Transportation charges N12,000

Storage N18,000

Insurance N25,000

Selling expenses N20,000

Agreed commission at 5% on sales

Required; show the relevant ledger account in the books of the consignor, Chicason
Illustration 2
On 21 February. 2001 Peter consigned to his agent James 95 Electric stove which cost N2,700
each. Insurance and freight amounted to N16,200. James is entitled to a commission of 10% of
gross sales. A bill was drawn and accepted by James for N200,000.
Five (5) Electric stove were destroyed in transit. James immediately returned 10 of the Electric
stove, which were of the wrong description and paid return freight and insurance of N3,000.
peter whose financial year ended on 30’ June, 2001 received from James an account of sales,
made up to that date this showed that James has sold 60 Electric stove for N324,000 and that he
had paid warehouse charges on the Consignment N4,800 (less returns) and carriage on the
Electric stove sold for N4,500. the bill matured and was paid accordingly. James sent a sight
draft in settlement of the balance due on which Peter incurred bank charges of N900. The
insurance claim on Electric stove destroyed of N1200 was received.
James sold the remaining Electric stove for N96,000 incurring expenses of N2,400. He sent Peter
a second account of sales made up to 30th September, 2001 accompanied by a sight draft for the
balance due on which Peter incurred bank charged of N600.
You are required to:
(a) Write up (for the period of 30/9/2001) the Consignment account and consignee’s a/c in
Peter’s books.
(b) Consignor’s account in James book.