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Consignment Accounting – CA Foundation Notes

 

Consignment Accounting – CA Foundation, CPT notes, PDF

This article is about consignment accounting for CA foundation CPT students. we also provide PDF file at the end.

consignment accounting

consignment accounting

What we will study in this chapter: We will study about consignment accounting of business transactions in both the parties (i.e. consignor and consignees) books. We will also see treatment of losses and purpose & procedure of invoice price accounting.

Consignment Accounting INTRODUCTION

When a trader/manufacturer wants to expand his business beyond his local limits, he can do it by appointing an agent at that place and selling the goods through him, known as consignment business.

The consignor (he is the owner/ principal) sends goods to consignee (he is the agent situated at some other place) for sale. Consignee sales the goods for and on behalf of the consignor. Profit or loss belongs to consignor. Consignee gets his expenses reimbursed from consignor & also some commission for this service. For the consignor, purpose of this accounting is to separately ascertain profit/loss of consignment business. This will help him to take appropriate decisions with regard to this business.

Consignee does the business for and on behalf of consignor and on the terms and conditions as instructed (directed) by the consignor.

Consignment becomes handy when a person wants to expand his business at other locations as well but where neither direct sale is possible nor he wants to open a branch.

The study of consignment accounting can be classified under following two methods –

♦       Cost price method

♦       Invoice price method

COST PRICE METHOD

In this method, consignor intimates to consignee and accounts in its books, the goods at cost. Stock at the end are also valued at cost. It is a very normal accounting and does not require any special adjustment.

16.1  MEANING AND DEFINITION:

16.1.1 Consignment business:

It is an arrangement whereby the owner sends his goods to an agent placed at some other location, who sells the same for and on behalf of the former, for a commission.

16.1.2 Parties in consignment:

♦       Consignor: He is the owner (principal). All profit loss belongs to him

♦    Consignee: He is the agent who works for and on behalf of the consignor and as per his instructions and gets commission for this services.

16.1.3   Account sale:

♦        Account sale is a statement sent by consignee to consignor periodically.

♦    It gives details of transactions entered by consignee on behalf of consignor during that period and the final balance due.

♦    It also contains the quantitative details, apart from the financial transactions like Sales, Expenses incurred, Commission due & advances paid.

♦        On the basis of account sale the consignor records entries in his books periodically.

16.1.4   Del-Credere commission and Bad debt losses:

♦    In normal course the bad debts loss due to credit sales is the loss of consignor (because he is the owner) and not of consignee.

♦    But sometimes the consignee agrees to take the risk of bad debt losses and in return he gets extra commission, known as Del Credere commission.

♦    Therefore, whenever Del Credere commission is payable, the bad debts loss will be borne by consignee and not the consignor.

♦    The Del Credere commission to be calculated on total sales and not only on credit sales unless otherwise specified.

16.2   ACCOUNTING:

16.2.1   Books of Account for accounting for consignment business:

♦        The entity will be having its books of account in which all its direct business transactions are being recorded.

♦    In the same books of account (ie. same cash book, journal, ledger, etc.) it will open few accounts, so as to separately identify the profit or loss on each consignment business.

♦    For consignee, whatever he is doing everything is on behalf of consignor, hence in his own books, he will prepare each consignors a/c.

♦        Thus no separate books of account by consignor or consignee.

16.2.2   Can there be more than one consignment account:

♦        Yes.

♦    Identifying profit/loss of consignment business separately from direct business, helps us to decide whether or not consignment activity should be continued.

♦    In the same manner consignment to different locations may have significantly differing profits and losses and hence it is advisable to have separate consignment a/c.

♦        Like consignment to Delhi a/c., consignment to Nagpur a/c. etc.

♦        So that if any particular consignment is not profitable, then the same can be discontinued or improved.

16.2.3   Main accounts prepared:

16.2.3.1   In the books of consignor:

Main accounts to be prepared are:

(1)     Consignment A/c: It will show profit or loss. It’s a profit and loss a/c. (a nominal a/c.).

(2)     Consignee’s A/c: It will show balance due to or due from consignee (a personal a/c.).

(3)     Goods sent on consignment A/c: At the year-end balance is transferred to Trading/Purchases a/c.

(4)     Consignment stock a/c. (an asset, a real a/c)

16.2.3.2   In the books of consignee:

Main accounts to be prepared are:

(1)     Consignor’s A/c: It will show balance due to or due from him (a personal a/c)

(2)     Commission A/c: It is the income earned (a nominal a/c)

16.2.4 Draft Journal Entries in the books of consignor and consignee.

Journal Entries

TransactionIn the books of consignorIn the books of consignee
(i) Goods sent by consignor & received by consignee (Cost = Qty × Rate)Consignment a/c Dr.

To Goods sent on consignment a/c.

– No entry –
(ii) Expenses paid by consignorConsignment a/c Dr.

To Cash/Bank a/c

– No entry –
(iii) Expenses paid by consigneeConsignment a/c Dr.

To Consignee a/c

Consignor a/c Dr.

To Cash/Bank a/c

(iv) Sales made by consigneeConsignee a/c Dr.

To Consignment a/c

Cash/Debtor a/c Dr.

To Consignor a/c

(v) Commission due to consigneeConsignment a/c Dr.

To Consignee a/c

Consignor a/c Dr.

To Commission a/c

(vi) Cheque/Draft received as advance or part or full paymentBank a/c Dr.

To Consignee a/ c

Consignor a/c Dr.

To cash/bank a/c

(vii) Closing stock with consigneeConsignment stock a/c Dr.

To Consignment a/c

– No entry –
(viii) Bad debts:

When Del Credere commission is not payable

When del credere commission is payable

Consignment a/c Dr.

To Consignee a/c

– No entry –

Consignor a/c Dr.

To Debtor a/c

Bad debts a/c. Dr.

To Debtor a/c

(ix) Net profit transferred .Consignment a/c Dr.

To Profit & Loss a/c

– No entry –
(x) Goods sent a/c. transferred/closedGoods sent on consignment a/ c Dr.

To Trading a/c/Purchase a/c

– No entry –

Goods sent on consignment a/c, is only a temporary a/c. These goods were debited to purchase a/c. when purchased. Thus goods sent on consignment a/c. represents reduction of purchase a/c. Hence, it is transferred to trading account/purchase a/c.

Illustration 16.1 : Raja Mills Ltd. of Ahmedabad sent 50 pieces shirting to fancy stores, Delhi, on consignment basis. The consignees are entitled to receive 5 per cent commission plus expenses. The cost to Raja Mills Ltd. is Rs. 35 per piece and spent Rs.250 for packing and forwarding. Fancy stores, Delhi, pay the following expenses:

Railway Freight etc. Rs. 100              Godown Rent and Insurance Rs. 50

Raja Mills Ltd., draw on the consignees a draft for Rs. 1,000 which is duly accepted. It is discounted for Rs. 970 Later. Fancy stores, Delhi, report that the entire consignment has been sold for Rs. 3,000.

Show journal entries in the books of the consignor & consignee.

Solution:

Journal Entries

TransactionBooks of Consignor i.e. Raja Mills, Ahmedabad 

Dr.

Rs.

Cr.

Books of Consignee i.e.

Fancy Stores, Delhi

 

 

Dr.

Rs.

Cr.

1.Goods sentConsignment a/c Dr. To G.S. on Consignment a/c1,750 

1,750

No entry
2.Expense by consignorConsignment a/c Dr. To Cash a/c250 

250

No entry
3.Expense by consigneeConsignment a/c Dr.

To Fancy Stores a/c

150 

150

Raja Mills a/c Dr.

To Cash a / c

150 

150

4.Bill drawn by consignor on consigneeBills Receivable a/c Dr.

To Fancy Stores a/c

1,000 

1,000

Raja Mills a/c Dr.

To Bills Payable a/c

1,000 

1,000

5.Bill discounted by Raja MillsBank a/c Dr.

Discount a/c Dr.

To Bills receivable a/c

970

30

 

 

1,000

No entry
6. All goods sold by consigneeFancy Stores a/c Dr.

To Consignment a/c

3,000 

3,000

Cash/bank/debtor a/c Dr. To Raja Mills a/c3,0003,000
7. Commission due to consigneeConsignment a/c Dr.

To Fancy Stores a/c

150 

150

Raja Mills a/c Dr.

To Commission a/ c

150150
8. Final dues paid by consignee to consignorBank a/c Dr.

To Fancy Stores a/c

1,700 

1,700

Raja Mills a/c Dr.

To Bank a/c

1,7001,700
9. Consignment Profit transferredConsignment a/c Dr.

To Profit & Loss a/c

700 

700

No entry
10. Commission transferredNo entryCommission a/c Dr.

To Profit & Loss a/c

150150

16.3      STOCK & LOSSES:

16.3.1     Stock ascertainment:

Quantity of Closing stock = Opening stock + Goods sent (-) Goods sold (-) Goods lost The details in the question may in terms of quantity, or in terms of %, or in value etc.

16.3.2      Stock valuation:

Valuation: Cost price (i.e. Qty. of stock × Rate)xxx
Add: Proportionate share of Expenses. The expenses of non-reoccurring nature like freight, Loading, unloading, clearing charges, customs duty, octroi, transit insurance (stock insurance is not to be taken) etc., whether paid by consignor or by consignee is taken here. 

 

xxx

Value of closing stockxxx

Important Notes: Regarding stock valuation:

(1)  From the above it is clear that we take only those expenditures for stock valuation, which are incurred for making the goods available at consignee’s godown. (non-recurring expense.)

(2)  The expense incurred thereafter like godown rent, stock insurance, selling expense etc. are not to be considered for stock valuation. These are expenses of re-occurring nature.

(3)  The normal principles of stock valuation Le. stock should be valued at cost or net realisable value whichever is lower as per AS-2, is applicable here also.

Entry: Consignment stock a/c Dr,          —

To Consignment a/c                                          —

Illustration 16.2 : In the illustration above suppose Fancy stores has sold 90% of the consignment. Other things remaining same value the closing stock.

Solution: Closing stock = Total qty, – sold = 50- 45 (90% of 50) = 5 pieces

Basic cost5×35 =175
Packing & Forwarding250× 5/50 =25
Freight100× 5/50 =10
Value of closing stock =210

16.3.3      Loss of goods:

♦          Reduction in the quantity or quality of goods which reduces its value, is loss of goods.

♦          The loss of material/goods can be either normal loss or abnormal loss.

♦    The loss which is inherent in that type of business or in general which is unavoidable or which will be occurring every time is called normal loss (Ex. Loss of petrol due to evaporation, some loss in perishable items) and

♦       The other losses like loss due to fire, theft, bad packaging etc. is abnormal loss.

♦       The treatment of such loss will depend upon whether it is normal loss or it is abnormal loss.

♦    E.g. 1000 units are sent, consignee reports sale of 700 units and closing balance of 250 units. That means 50 units are lost. Depending upon the reason of loss it will be classified as normal or abnormal loss.

16.3.3.1 Treatment of normal loss:

♦        We don’t have to value it or to exclude it from the consignment a/c because it is a normal loss.

♦    But while valuing the closing stock the cost or the expenses, which are incurred for the total quantity and which have to be considered for stock valuation will be divided by the normal quantity and not by the total quantity.

♦    Thus to that extent cost of good unit gets increased or in other words the amount of normal loss gets spread over the normal quantity.

♦        Normal Qty. = Total Qty. (-) Normal loss                                                                                       J

♦        Scrap value of normal lost quantity should be credited to consignment A/c.

Cost per unit =

Illustration 16.3 : Unit 10000, costing Rs. 20 (including transportation, etc.) are in consignment business. Consignee sold 8000 units and 1750 units are in stock. Loss is normal loss. Value stock if (i) lost unit has no scrap value or (ii) has a value of Rs. 5 per unit.

Solution.

Loss unit = 10,000 8,000 – 1,750 = 250 units Normal quantity = 10,000 – 250 = 9,750 units (i) If no scrap value

Cost per unit =  =  = 20.512

Value of closing stock = 1,750 × 20.512 = Rs. 35,896

(ii) If lost unit has scrap value (250 × 5 = Rs. 1250)

Cost per unit =  =  = 20.384

Value of closing stock = 1,750 × 20.384 = Rs. 35,672

Student should observe it that cost has increased from Rs. 20 to 20.512 (or 20.384) this is due to inclusion of normal loss in it.

16.3.3.2 Treatment of Abnormal loss:

♦       The valuation of abnormal loss should be made like the valuation of closing stock.

♦    Because it is an abnormal loss, it should not affect the normal profit shown by the consignment A/c

♦    Therefore we should exclude such abnormal loss from the consignment A/c by passing following entry. Abnormal loss A/c Dr. …

To Consignment A/c

♦    The scrap value or insurance claim etc. of such abnormal lost quantity should be credited to Abnormal loss a/c & the balance left in that a/c will be transferred to P & L A/c.

Illustration 16.4 : Goods sent on consignment 10,000 units costing Rs. 50/- each. Abnormal loss due to accident 1000 units. Sold by the consignee 7000 units. Value abnormal loss and closing shock if (i) scrap value is Nil or (ii) scrap value is Rs. 10 per unit.

Solution.

Cost of goods sent = 10,000 × 50                               = 5,00,000/-

Closing stock = 10,000 – 1,000 – 7,000                       = 2,000 units

Normal quantity = 10,000 – 0 (Normal loss)                = 10,000 units.

(i) If there is no scrap value

Abnormal loss = 1000 × 50                                         = Rs. 50,000/-

Closing stock = 2000 × 50                                          = Rs. 1,00,000/-

(ii) If there is scrap value (1000 × 10 = Rs. 10000)

Net abnormal loss      = Rs. 50,000 – Rs. 10,000 (scrap value) = Rs. 40,000/-

Closing stock              = 2,000 × 50                                            = Rs. 1,00,000/-

You must have observed that normal loss affect valuation of closing stock and cost of goods sold, hence affects profit as well. But abnormal loss will not affect closing stock, or cost of goods sold and hence does not affect profit/ loss shown by consignment account.

Lost unit is out of the total goods sent which is always debited to consignment a/c, thus loss whether normal or abnormal is already debited to consignment a/c. What now we have to decide is to leave it here (as in case of normal loss) or to remove it from here (as in case of abnormal loss). That is why you do not have to value or pass entry for normal loss but you have to do this in case of abnormal loss.

Loss both Normal as well as Abnormal

Illustration 16.5 : Goods sent on consignment 10,000 units costing Rs. 50/- each. Abnormal loss due to accident 600 units. 4% of the total units is normal loss. Sold by the consignee 7000 units. Value abnormal loss and closing shock if (i) scrap value is Nil or (ii) scrap value is Rs. 10 per unit.         .

Solution.

Cost of goods sent = 10,000 × 50                                  = 5,00,000/-

Closing stock = 10,000 – 400 – 600 – 7,000                    = 2,000 units

Normal quantity = 10,000 – 400 (Normal loss 4% of 10,000) = 9,600 units.

(i) If there is no scrap value

Cost per unit =  =  = 52.083

Abnormal loss = 600 × 52.083 = Rs. 31,250/-

Closing stock = 2000 × 52.083 = Rs. 1,04,166/-

(ii) If there is scrap value (Normal lost unit 400 × 10 = Rs. 4,000) & (Abnormal lost unit 600 × 10 = Rs. 6,000)

Cost per unit =  =  = 51.666

Abnormal loss = 600 × 51.666                                                           = Rs. 31,000/-

Net abnormal loss = Rs. 31,000 – Rs. 6,000 (scrap value)                = Rs. 25,000/-

Closing stock = 2,000 × 51.666                                                         = Rs. 1,03,332/-

ILLUSTRATIONS

Consignment accounting: Simple

Illustration 16.6 : Raja Mills Ltd. of Ahmedabad sent 50 pieces shirting to fancy stores, Delhi, on consignment basis. The consignees are entitled to receive 5 per cent commission plus expenses. The cost to Raja Mills Ltd. is Rs. 35 per piece and spent Rs.250 for packing and forwarding. Fancy stores, Delhi, pay the following expenses:

Railway Freight etc. Rs. 100 Godown Rent and Insurance Rs. 50

Raja Mills Ltd., draw on the consignees a draft for Rs. 1,000 which is duly accepted. It is discounted for Rs. 970 later. Fancy stores, Delhi, report that the entire consignment has been sold for Rs. 3,000.

Show the important ledger account in the books of the consignor & consignee.

Solution:

In the books of Raja Mills (Consignor) A/c

Consignment A/c

ParticularsRs.ParticularsRs.
To G.S. on consignment a/c (50×35)1,750By Fancy stores a/c (sales)3,000
To Cash a/c (Packing & forwarding expense)250
To Fancy stores a/c
Freight100
Rent50150
To Fancy stores a/c (Comm, due 5% of 3000)150
To P&L a/c (Consignment profit transferred)700
3,0003,000

Fancy Stores A/c (Consignee)

ParticularsRs.ParticularsRs.
To Consignment a/c (Sales)3,000By Consignment a/c (Expenses incurred)150
By Bills Receivable a/c1,000
By Consignment a/c (commission)150
By Bank a/c. (final dues recovered)1,700
3,0003,000

Goods Sent on Consignment A/c

ParticularsRs.ParticularsRs.
To Trading/purchase a/c1,750By Consignment a/c1,750
1,7501,750

Bills Receivable A/c

ParticularsRs.ParticularsRs.
To Fancy stores a/c1,000By Bank a/c970
By Discount a/c30
1,0001,000

Note: This discount Rs. 30 will be debited to P&L a/c being a financial expense, but if required by question it can be debited to consignment a/c.

In the books of Fancy Stores (Consignee)

Raja Mills A/c (Consignor)

ParticularsRs.ParticularsRs.
To Cash/bank a/c (Expenses incurred)150By Cash/Bank/Debtor a/c (sale)3,000
To Bills Payable a/c1,000
To Commission a/c150
To Bank a/c (final dues paid)1,700
3,0003,000

Commission A/c

ParticularsRs.ParticularsRs.
To Profit & Loss a/c150By Raja Mills a/c150
150150

Consignment accounting: Simple with stock, Also Account Sale

Illustration 16.7 : On 1st September, 2005 Mehra of Kanpur dispatches on consignment Krishnan of Madras 50 cases of woollen goods invoiced proforma at Rs. 150 per case to be sold by the latter on the consignor’s account. A commission of 3% payable to Krishnan upon sales and all charges are borne by Mehra.

Mehra pays freight and insurance at Kanpur amounting to Rs. 510 and draws upon Krishnan at 3 months sight for Rs. 4,500 against dispatch.

Krishnan sells for cash 10 cases at Rs. 1.80 a case on 1 st October, 2005,25 cases at Rs. 202.50 a case on 10th October and the balance on 30th October, 2005 at Rs. 195 a case . He forwards an Account sales to Mehra on 2nd November, 2005 deducting the commission due and charges incurred, such charges amounting to Rs. 405 for unloading, Cartage, storage, etc. and remits a draft for the balance.

You are required to prepare the Account Sales and to show the transactions would appear in the Consignor’s books.

Solution:

Account Sales

To be rendered by Krishnan to Mehra for the Period 1.9.05 to 31.10.05

(A) Quantitative details: → Woollen Goods:Number of cases
Opening BalanceNil
+ Received50
Total50
(-) LostNil
(-) Sold50
Balance in StockNil
(B) Financial details:Rs.
Sales 1.10 (10 × 180)= 1,800
10.10(25×202.5)= 5,063
30.10(15 × 195)= 2,9259,788
Less: Expenses: Unloading Charges etc.405
Commission due294699
Due to You9,089
Less: Advance bill of exchange given4,500
Net due now4,589
D.D. No. ….. Dated …. enclosed herewith4,589
Balance if anyNil
Date: 2.11.05
Place: MadrasSigned by Krishnan

Note: Account sale does not have any specific format. Draft it to contain full information which consignee should give to consignor,

In the book of Mehra (Consignor)

Consignment A/c

ParticularsAmountParticularsAmount
To Goods Sent On Consignment A/c7,500By Krishnan A/c (sales)
To Cash/Bank A/c (Freight)5101.10.98 – 10 × 1801800
To Krishnan A/c (Commission)29410.10.98 = 25 × 202.55063
To Krishnan (Loading, Cartage,30.10.98 = 15 × 19529259,788
Storage etc.)405
To Profit Transfer to P&L A/c1,079
9,7889,788

Krishnan’s A/c

To Consignment A/c (sales)9,788By B/R A/c4,500
By Consignment (commission)294
By Consignment A/c (Loading etc.)405
By Bank A/c (Final dues received)4,589
9,7889,788

Goods sent on consignment A/c

To Trading/purchase A/c7,500By Consignment A/c7,500
7,5007,500

Bill receivable A/c

1.9. To Krishnan A/c4,50031.10 By Balance c/f (being not yet due)4,500
4,5004,500

Consignment accounting: With abnormal loss

Illustration 16.8 : Somesh of Calcutta consigned 100 cases of candles to sailesh of Bankura. Which cost him Rs. 30 per case. He incurred the following costs packing Rs. 40 carriage Rs. 20 and Railway Freight (paid in advance) Rs. 40 Some of the cases were damaged in transit and Sailesh took delivery of 90 cases only He (Sailesh) spent Rs. 10 for carriage and Rs. 40 for godown rent and sold consignment at Rs. 35 per case. He sent the net amount to Somesh after deducting his expenses and commission at the rate of 5 per cent on the sale proceeds together with his Account sales. Somesh also received Rs. 180 from the Railway as damages. Show how the transactions would appear in the books of Somesh.

Solution:

In the book of Somesh (consignor)

Consignment A/c

ParticularsAmountParticularsAmount
ToGoods Sent On Consignment A/c3,000By Sailesh (Sales) A/c3,150
ToCash A/cBy Abnormal Loss A/c310
Packing40
Carriage20
Freight40100
ToSailesh A/c
Carriage10
Rent4050
ToSailesh A/c (Commission)158
ToProfit Transferred to P&L A/c152
3,4603,460

With the freight, words ‘paid in advance’ is written it should not be mis-understood as ‘prepaid’ which means for the next financial year. Here it is paid before the journey starts hence advance is written, but it is for this consignment only and hence treated as expense.

Sailesh A/c (Consignee)

ParticularsAmountParticularsAmount
To Consignment A/c (sales)3,150By Consignment A/c (exp. paid)50
By Consignment A/c (comm, due)158
By cash/bank A/c (bal. recovered)2,942
3,1503,150

Goods sent on consignment A/c

To Trading A/c 3,000By Consignment A/c3,000
3,0003,000

Abnormal loss A/c

To Consignment A/c310By cash (claim from Railway)180
By Net abnormal Loss trf. to P&L A/c130
310310

Calculations

Abnormal Loss (10 Cases)
Basic cost @300
Freight, packing @10
Total cost310

In the books of Shailesh (Consignee)

Somesh (Consignors) A/c

ParticularsRs.ParticularsRs.
To Cash bank (exp. paid)50By Cash/bank/debtors (sales made)3,150
To Commission a/c (due)158
To Cash/Bank (net balance paid)2,942
3,1503,150

Commission A/c

ParticularsRs.ParticularsRs.
To P&L a/c (income transferred)158By Somesh a/c158
158158

Consignment accounting: With Normal loss, Abnormal loss and Stock

Illustration 16.9: The Swastik Oil Mills, Bombay, consigned 10,000 Kg. of castor Oil to Dass of Calcutta on 1 st April 2006. The cost of the oil was Rs. 2 per Kg. The Swastik Oil Mills paid Rs.5,000 as freight and insurance. During transit 250 Kg. were accidentally destroyed for which the insurers paid, directly to the consignors, Rs. 450 in full settlement of the claim.

Dass took delivery of the consignment on the 10th April. On 30th June, 2006, Dass reported that 7,500 Kg. were sold at Rs. 300 the expenses being on godown rent Rs. 200/- on advertisement Rs. 1,000 and on salesman’s Rs. 2,000. Dass is entitled to a commission of 3 per cent plus 1.5 per cent del credere. A party which had bought 1,000 was able to pay only 80% of the amount, due from it.

Dass reported a loss of 100 kg. as handling loss. Assuming that Dass paid the amount due by bank draft, show the account in the books of both the parties. The Swastik Oil Mills Ltd. close books on 30th June.

Solution:

In the Books of Consignor

Consignment A/c

ParticularsRs.ParticularsRs.
To Goods Sent On Consignment A/c20,000By Dass A/c (Sales)22,500
To Cash A/c (Freight & Insurance)5,000By Abnormal Loss A/c631
To Consignee (Dass) A/cBy Normal Loss (Scrap Value)
Rent200By Consignment Stock5,429
Advertisement1,000By Net Loss trf. to P&L653
Sales Man2,0003,200
To Dass A/c (Commission)1,013
29,21329,213

Dass (consignee) A/c

To Consignment A/c (sale)22,500By Consignment A/c (Rent etc.)3,200
By Consignment A/c (commission)1,013
By Bank A/c (Final dues received)18,287
22,50022,500

Goods sent on consignment A/c

To Trading A/c20,000By Consignment A/c20,000
20,00020,000

Consignment stock A/c

To Consignment A/c5,429By balance c/d5,429
5,4295,429

Abnormal loss A/c

To consignment A/c631By Cash A/c (insurance claim)450
By Net abnormal loss trf. to P&L A/c181
631631

Calculation : Normal quantity = Total qty. – Normal loss = 10000 – 100 = 9900

Closing stock = Total qty.- sold – lost = 10,000 – 7,500 – 250 – 100 = 2,150

ValuationClosing stock (2150kg.)Abnormal loss (250kg.)
Basic cost @4,343505
Freight & insurance @1,086126
5,429631

In the book of Dass (consignee)

Consignor (Swastik oil mill) A/c

ParticularsRs.ParticularsRs.
To Cash/Bank (Rent etc.)3,200By Cash/Bank/Debtor A/c (Sales)22,500
(200 + 1000 + 2000)
To Commission A/c (22500 × 4.5%)1,013
To Cash/Bank A/c (Balance paid)18,287
22,50022,500

Bad debt A/c

To debtor A/c (80 % was paid)600By P&L A/c600
∴ (× 3000)
600600

Commission A/c

To P&L A/c1,013By Consignor A/c1,013
1,0131,013

Consignment accounting : With Abnormal loss and Opening & Closing Stock

Illustration 16.10 : A cotton Mill at Ahmedabad sends regular consignments of cloth to M/s. Lall & Sons of Lucknow who are agents for selling the cloth at the risk of the Mill and are entitled to a commission of 10 paise per Kg. cloth sold. This includes del credere commission.

Stock of cloth with agents at the beginning 20,000 kg. costing 50,000/- Total quantity of cloth consigned 1,60,000 kg. at Rs. 3.00 per Kg.

Total Quantity of cloth sold 1,50,000 kg. at Rs. 3.75 per kg.

Total remittances by the agents Rs. 5,10000.

Railway Freight paid by the agents Rs. 40,000 of sales M/s Lall & Sons could not collect Rs. 11,000 due to insolvency of a customer.

5,000 of cloth was damaged by the railway for which the agents recovered Rs. 6,000. The damaged goods were sold at the rate of Rs. 1.50 per kg. Record the transactions in the books of the Mill.

Solution:

In the books of cotton mill, Ahmedabad (consignor) account

Consignment A/c

ParticularsRs.ParticularsRs.
To Opening stock a/c50,000By Consignee a/c (sale)5,62,500
To Goods Sent on Consignment a/c4,80,000By Abnormal loss a/c16,250
To Consignee a/c40,000By Consignment stock a/c81,250
To Consignee a/c
(Commission 150000 × .10)15,000
To P&L a/c75,000
6,60,0006,60,000

M/s. Lall & Sons, Lucknow (Consignee) A/c

To Consignment a/c (sale proceeds)5,62,500By Bank a/c5,10,000
To Abnormal loss a/c (claim received)6,000By Consignment a/c40,000
To Abnormal loss a/c (stile proceeds)7,500By Consignment a/c (commission)15,000
By Abnormal loss a/c (commission)500
By Balance c/f.10,500
5,76,0005,76,000

Goods Sent on Consignment A/c

ParticularRs.ParticularRs.
To Trading a/c4,80,000By Consignment a/c4,80,000

Abnormal loss A/c

ParticularsRs.ParticularsRs.
To Consignment a/c16,250By M/s. Lall & Sons a/c (Claim received)6,000
To Consignee a/c (commission on sale)500By M/s. Lall & Sons a/c (sale proceeds)7,500
By P&L a/c (Net abnormal loss transferred)3,250
16,75016,750

Consignment stock A/c

To Consignment a/c81,250By Balance c/f.81,250

Valuation (FIFO method)

Abnormal lossStock
Quantity500025000
Basic cost @31500075000
Expenses freight (40000/160000)12506250
Total16,25081,250

INVOICE PRICE METHOD

Sometimes the consignor while sending goods to consignee intimates him a inflated price known as invoice price. If he does accounting in his books by using this invoice price, it is known as invoice price method.

Whatever has been studied under cost price method in previous section is equally applicable in this also, with very small changes in entries related to goods in the books of consignor. Goods received and closing stock are not transactions for consignee and hence invoice price method will have no change as far as the books of consignee are concerned.

16.4 TERMS:

16.4.1 Invoice price:

♦    Sometimes the consignor, while sending the goods to the consignee prepares the proforma invoice at price which is higher than the cost, it can be termed as invoice price.

♦       Invoice price = cost price + loading

♦       This is done with the main intention that:

■ consignee should not know the true profits earned by the consignor.

■ Or it can be to put restriction on the mind of consignee to not to sale below a certain price.

16.4.2  Loading:

♦       Loading is notional amount added to the price of goods while sending it to consignee.

♦       Loading = Invoice price – Cost price

16.4.3 Stock reserve:

♦    Stock reserve is the amount of loading included in the value of closing stock, when the same is valued on the basis of invoice price.

Basic principle for stock valuation as per AS-2 Inventory valuation is that stock should be valued at cost or net realizable value whichever is lower. Hence in above case when stock is valued at invoice price, which is above its cost, the rectification is done by passing an entry for stock reserve.

Illustration 16.11 A sends goods to B costing Rs.50,000 at a profit of 20% on cost. 25% of the goods are in stock.

Solution: Invoice price = Cost Rs.50,000 + Loading 20% of 50,000 z.e. 10,000 = Rs.60,000 Loading = 50,000 × 20% = Rs. 10,000.

Invoice value of closing stock = 60,000 × 25% = Rs.l5,000

Stock Reserve = 15,000 × 20/120 = Rs.2,500 or = 10,000 × 25% = Rs.2,500

Illustration 16.12 A sends goods to B costing Rs.50,000 invoiced to show a profit of 20% on invoice price. 25% of the goods are in stock.

Solution: Invoice price = Cost Rs.50,000 + Loading 20% of Invoice price i.e.12,500 = Rs.62,500 Loading = 50,000 × 20/80 = Rs.12,500.

Invoice value of closing stock = 62,500 × 25% = Rs. 15,625

Stock Reserve = 15,625 × 20/100 = Rs.3,125 or = 12,500 × 25% = Rs.3,125

Illustration 16.13 A sends goods to B invoiced at Rs.50,000 at a profit of 25% on cost. 20% of the goods are in stock . Solution: Cost price = Invoice price Rs.50,000 – Loading 25% of costi.e.10,000 = Rs.40,000 Loading = 50,000 × 25/125 = Rs.10,000.

Invoice value of closing stock = 50,000 × 20% = Rs.10,000

Stock Reserve = 10,000 × 25/125 = Rs.2,000 or = 10,000 × 20% = Rs.2,000

Illustration 16.14 A sends goods to B invoiced at Rs.50,000 at a profit of 25% on invoice price. 20% of the goods are in stock.

Solution: Cost price = Invoice price Rs.50,000 – Loading 25% of 50000 i.e. 12,500 = Rs.37,500 Loading = 50,000 × 25/100 – Rs.12,500.

Invoice value of closing stock = 50,000 × 20% = Rs. 10,000

Stock Reserve = 10,000 × 25/100 = Rs.2,500 or = 12,500 × 20% = Rs.2,500

You must have observed that in 1st & 2nd illustration, the figure given is cost of goods sent whereas in 3rd & 4th illustration, the figure given is invoice value of goods sent Similarly in 1st & 3rd illustration, the % of profit (loading) is on cost of goods, whereas in 2nd & 4th illustration, the % of profit (loading) is on invoice value of goods.

16.4.4   Overriding commission:

♦        Overriding commission is the extra/additional commission given over and above the normal commission.

♦        Like for taking the risk of bad and doubtful debts the del credere commission is given.

♦        For selling at higher prices, some % of extra price realized (may be selling price – invoice price) is given.

♦        Similarly for developing market for new product or selling in new areas extra commission can be given.

♦    Even higher commission may be offered in lieu of reimbursement of certain selling and administrative expenses.

16.5   ACCOUNTING:

16.5.1   Changes in Accounting in case of Invoice Price Method:

♦        Accounting in the books of consignee will have no change.

♦        In the consignor’s books following changes will be made.

(i) Entry for goods sent will be passed at Invoice price value.

Consignment A/c Dr. …..

To Goods sent on consignment a/c ….

(ii) At the end of the year the loading (invoice price-cost price) included in the goods sent is reversed.

Goods sent on consignment A/c                       Dr. ….

To Consignment A/c

(iii) The closing stock is also valued at invoice price + proportionate non-re-occurring expenses.

Consignment Stock a/c                                       Dr….

To Consignment a/c

(iv) The loading included in stock valuation is eliminated by creating stock reserve.

Consignment A/c ….                                            Dr….

To Stock reserve A/c

(v) In invoice price method also the abnormal loss will be valued at cost and not at invoice price

♦        Rest of the accounting will be same as studied in case of Cost price method.

♦    In the next period this stock will be debited to consignment a/c. as opening stock and opening stock reserve will be credited to consignment a/c.

Illustration 16.15 : Taking the figures of Illustration: 16.14. pass the Journal entries.

Solution:

(i) Entry for goods sent.
Consignment A/cDr.50,000
            To Goods sent on consignment A/c50,000
(ii) At the end of the year the loading (invoice price-cost price) included in the goods sent is reversed.
Goods sent on consignment A/cDr.12,500
            To Consignment A/c12,500
(iii) Entry for the closing stock.
Consignment Stock A/cDr.10,000
            To Consignment A/c10,000
(iv) The loading included in stock valuation is eliminated by creating stock reserve.
Consignment A/cDr.2,500
            To Stock reserve A/c2,500
(v) Cost of Goods sent transferred to trading account.
Goods sent on consignment A/cDr.37,500
To Trading A/c37,500

16.5.2   Effect on profit under invoice price method:

♦        The profit under invoice price method will be same as in cost price method.

♦        Profit under cost price method = Sale value – Cost price

♦    Profit under invoice price method = Sale value – Cost price (because loading is reversed and stock reserve is created).

Student should be careful while solving a problem, the use of word like proforma, invoice, invoice price, invoice value does not necessarily mean invoice price method. If you find two prices one is the cost price and the other is a inflated price or the information is given from which this two prices can be determined then only it is a case of invoice price method. In cost price method as well as invoice price method, the selling price (the price at which consignee sales the goods) will also be given.

16.5.3   Memorandum Column Method:

♦    In consignment a/c & in Goods sent on Consignment a/c one additional column i.e. memorandum column is prepared.

♦    In main column amount will be recorded at cost & in Memorandum column amount will be recorded at Invoice Value but no adjustment for reversing loading or stock Reserve is to be made.

♦    Memorandum Column will show profit or loss as per Invoice value.

♦    Main column will show profit or loss as per cost basis, this profit will be transferred to capital account.

♦    Profit under memorandum column = Sale value – Invoice price

♦    when consignor is in a position to directly sale to someone there on wholesale basis at invoice price, then this calculation shows the retail profit earned by selling through consignee on retail basis.

Whenever memorandum column or memorandum account word is used the 1st thing you should remember is that it is not an account, it is not part of double entry system. It is prepared in the form of an account to get some specific information. Like here it tells what will be the profit if invoice price itself is the cost, also sometimes referred as retail profit. This memorandum column profit will not be transferred to capital/P&L, etc. because it is not an accounting figure.

16.5.4   Use of Invoice Value based profit (Retail profit) Calculated by Memorandum Column:

♦    If we have a realistic option either to sale in bulk (wholesale) or in retail through consignee, in such cases we would be interested to know what is the result (profit) of appointing consignee.

♦    For this treat wholesale price as invoice price and ascertain profit by Memorandum Column, the resultant profit/loss is the result of appointing consignee and making retail sale.

♦    That means if this result is loss, it is better to sale to someone on wholesale instead of selling in retail through consignee.

♦    If it shows profit, this is the retail profit over and above wholesale profit (loading realized). The cost column shows the total of this known as actual profit.

16.5.5   Accounting for debtors in the books of consignor:

♦    The usual practice is that when goods are sold, consignee’s account is debited for cash as well as credit sales and hence debtors do not appear separately.

♦    The amount due from consignee will be inclusive of debtors if any.

♦    The above accounting will be perfectly all right when del credere commission is given to consignee.

♦    Because in that case consignee is responsible to make full payment of credit sale irrespective of ultimate collection and hence consignor is not concerned with the debtors.

♦    But when del credere commission is not given then consignor carries the risk of debtors (Bad debt risk) and hence it is more proper to show consignment debtor a/c. and when collection is made then credit debtor and debit consignee account.

16.6   OTHER SPECIAL FEATURES:

16.6.1  Advance Vs Security Deposit from consignee:

Some times consignee may pay advance at the start or during the period.

No special treatment is required it will be credited to consignee and will get adjusted from the amount due on account of sale.

But when it is kept as security deposit for goods, then the amount proportionate to closing stock should remain as security deposit at the end i.e. full amount should not get adjusted.

It can be treated as security deposit when it is given as some percentage of the value of goods sent to consignee.

Illustration 16.16 : Goods costing Rs. 4,00,000 sent to ‘A’ (Consignee) who immediately pays 75% of the cost of Goods. He is entitled for 10% commission. He sales 3/4th of Goods for Rs. 4,50,000. Show A’s account.

Solution:

A (Consignee) A/c

ParticularsRs.ParticularsRs.
To Consignment a/c (Sale)4,50,000By Bank (Security deposit 7596)3,00,000
To Closing balance (Security deposit)By Consignment account (Commission)45,000
75% of stock balance Rs. 1,00,00075,000By Bank (Final balance recovered)1,80,000
5,25,0005,25,000

Had it been a normal advance then Rs.75,000 credit balance will not be retained and hence the amount remitted by the consignee will be Rs. 1,05,000

ILLUSTRATIONS

Simple problem on Invoice price method with stock

Illustration 16.17 :On 1 st January, 2006 Lila & Co. of Calcutta consigned 100 cases of Milk Powder to Shila&Co. of Bombay. The goods were charged at a proforma invoice value of Rs. 10,000 including a profit of 2596 on invoice price. On the same date the consignor paid Rs. 600 for freight and insurance. On 1st July, the consignees paid import duty Rs. 1,000, dock dues Rs. 200. On 1st August, they sold 80 cases for Rs. 10,500 and sent a remittance for the balance due to the consignor after deducting commission at the rate of 5% on gross sale proceeds. Show the Consignment Account and Shila & Co’s Account in Lila & Co’s Book.

Solution :

Lila & Co’s Ledger

Consignment to Bombay A/c

DateParticularsAmount

Rs.

DateParticularsAmount

Rs.

20062006
Jan.1To Goods sent on Consignment10,000Jan.By Goods Sent on
To Bank :(Freight & Insurance)600Consignment (Loading)2,500
Jul.1To Shila & Co.Aug.1By Shila & Co. (Sales)10,500
Import Duty1,000By Stock out on Consignment
Dock Duty200Invoice price2,000
Commission5251725Exp. (1/5 of 1800)3602,360
To Stock Reserve (25% of 2,000)500
To Profit transf. to Profit & Loss A/c2,535
15,36015,360

Shila & Co’s A/c

DateParticularAmount

Rs.

DateParticularsAmount

Rs.

20062006
Aug. 1To Consignment to Bombay A/c10,500July 1By Consignment to Bombay A/c (Exp. & Commission)1,725
Aug.lBy Bank A/c (Final Payment)8,775
10,50010,500

Goods sent on Consignment Account

ParticularsRs.ParticularRs.
To Consignment a/c2,500By Consignment a/c10,000
To Trading a/c7,500
10,00010,000

Consignment Stock A/c

ParticularRs.ParticularRs.
To Consignment a/c2,360By Balance c/f.2,360
2,3602,360

Stock Reserve A/c

ParticularRs.ParticularRs.
To Balance c/f500By Consignment a/c500
500500

Working Notes:

Rs.
(i) Loading on goods sent on consignment 25% on Rs. 10,0002,500
(ii) Loading on Closing Stock 25% on Rs. 2,000500
(iii) Direct expenses included in valuation of closing stock 1/5 of Rs. 1,800 (600+1000+200)360

Problem on Invoice price method with stock, abnormal loss & del credere commission.

Illustration 16.18 : On 1st January, 2006, Pawan sent on consignment to Raman, 10 cases of tea costing Rs. 5,000 each invoiced proforma at Rs. 6,000 each. Freight and other charges on the consignment amounted to Rs. 3,100.

On 31st March, 2006, Raman sent an account sales showing that 4 cases had been sold at Rs. 6,000 each and 3 cases at Rs. 7,000 each while 3 cases remained unsold. Raman also informed Pawan that of the three cases remaining in stock, two cases were badly damaged due to bad packing and that they would be sold at Rs. 3,000 per case (take as NRV).

Raman was entitled to a commission of 5% on gross sales which included del credere commission. Raman could recover Rs. 4,000 only from a customer to whom one case had been sold on credit for Rs. 6,000. Amount of all other sales were duly received.

On 31st March, 2006, Raman paid the amount due to Pawan by means of a cheque. Prepare the ledger accounts in the books of Pawan & Raman.

Solution:

In the books of Pawan (consignor)

Consignment A/c

ParticularsRs.ParticularsRs.
To Goods sent on Consignment a/c .60,000By Raman a/c (Sales 4 × 6000=24000)
To Cash a/c (Freight & other charges)3,100+ 3X 7000=2100045,000
To Raman a/c (Commission 5%)2,250By Abnormal loss a/c (2 cases)
To Stock reserve a/c1,000(5000 × 2+3100 + 10 × 2)10,620
To Net profit transferred to P&L a/c5,580By Consignment stock a/c (1 cases)
(6000+3100 + 10)6,310
ByG.S. on consignment a/c (loading reversed)10,000
71,93071,930

Raman (Consignee) A/c

ParticularsRs.ParticularsRs.
To Consignment a/c45,000By Consignment a/c2,250
By Bank a/c42,750
45,00045,000

Goods sent on Consignment A/c

ParticularsRs.ParticularRs.
To Consignment a/c (1000 × 10)10,000By Consignment a/c60,000
To Trading a/c50,000
60,00060,000

Abnormal Loss A/c

ParticularRs.ParticularsRs.
To Consignment a/c10,620By P&L a/c (Net loss transferred)4,620
By Balance stock (3000 × 2)6,000
10,62010,620

Note: Expected sale value of damaged goods Rs.3,000 is assumed as net realizable value.

Consignment Stock A/c

ParticularRs.ParticularRs.`
To Consignment a/c6,310By Balance c/f.6,310
6,3106,310

Stock Reserve A/c

ParticularRs.ParticularRs.
To Balance c/f1,000By Consignment a/c1,000
1,0001,000

In the books of Raman (consignee)

Pawan (Consignor) A/c

ParticularsRs.ParticularRs.
To Commission a/c2,250By Debtor a/c45,000
To Bank a/c. (balance paid)42,750
45,00045,000

Commission A/c

ParticularRs.ParticularRs.
To Profit & loss a/c2,250By Pawan a/c2,250
2,2502,250

Debtors A/c

ParticularRs.ParticularRs.
To Pawan a/c45,000By Bad debt a/c2,000
By Cash/Bank a/c43,000
45,00045,000

Bad debt A/c

ParticularRs.ParticularRs.
To Debtors a/c2,000By P&L a/c2,000
2,0002,000

Note: (i) Del credere commission is being paid, hence bad debt loss Rs. 2,000/- is to be born by Raman (consignee), (ii) In the balance sheet stock will be :

Stock6,310
(-) Stock reserve1,0005,310
+ Stock of damaged goods6,000
11,310

Problem on Invoice price method with stock, Overriding commission (Solved by Memorandum Column also)

Illustration 16.19 : D of Delhi appointed A of Agra as its selling agent on the following terms:

(a)    Goods to be sold at invoice price or over.

(b)    A to be entitled to a commission of 7.5% on the invoice price and 20% of any surplus price realised.

(c)    The principals to draw on the agent a 30 days bill for 80% of the invoice price.

On 1 st February, 2006, one thousand cycles were consigned to A, each cycle costing Rs. 640 including freight and invoiced at Rs. 800.

Before 31st March, 2006 (when the principal’s books are closed) A met his acceptance on the due date; sold off 820 cycles at an average price of Rs. 930 per cycle, the sale expenses being Rs. 12,500; and remitted the amount due by means of Bank Draft. Twenty of the unsold cycles were shop-soiled and were to be valued at a depreciation of 50%.

Show by means of ledger accounts how these transactions would be recorded in the books of A, and find out the value of closing stock with A at which value D will account for the balance stock.

Solution:

In the Books of ‘D’ (Consignor)

Consignment A/c

ParticularsRs.ParticularsRs.
To G. S. on Consignment a/c8,00,000By A a/c (820 × 930) (sale)7,62,600
(1000 × 800)By Closing stock1,36,000
To A a/c (selling expenses)12,500By Goods sent on consignment a/c
To A a/c (commission)70,520(loading reversed)1,60,000
To Stock reserve a/c27,200
To P&L a/c1,48,380
10,58,60010,58,600

A (Consignee) A/c

ParticularRs.ParticularsRs.
To Consignment a/c7,62,600By B/R a/c6,40,000
By Consignment a/c (selling exp.)12,500
By Consignment a/c (commission)70,520
By Bank (balance recovered)39,580
7,62,6007,62,600
  1. R. A/c
ParticularRs.ParticularRs.
To A a/c6,40,000By Bank a/c6,40,000
6,40,0006,40,000

Commission Calculation :

Sale value (820 × 930)7,62,600
(-) Invoice value (820 × 800)6,56,000
1,06,600
Commission7.5% of 65600049,200
20% of 10660021,320
70,520

 

Valuation of stockGood unitsDamaged units
Unit16020Total
Invoice value800 × 160=1,28,000400 × 20 = 8,0001,36,000
Cost price640 × 160 = 1,02,400320 × 20 = 6,4001,08,800
Loading25,6001,60027,200

Memorandum column method

Consignment A/c

ParticularsCost Rs.Invoice Price Rs.ParticularsCost Rs.Invoice Price Rs.
To G. S. C. a/c6,40,0008,00,000By Consignee a/c7,62,6007,62,600
To Consignee a/c (expenses)12,50012,500By Closing stock1,08,8001,36,000
To Consignee (commission)70,52070,520
To P&L a/c1,48,380
To Profit on I. P. basis15,580
8,71,4008,98,6008,71,4008,98,600

Note: In above solution loss due to damage is treated as normal loss. Alternatively it can be treated as abnormal loss. In that case 50% of the cost of 20 units Le. Rs. 6400 be transferred to abnormal loss a/c and hence profit shown by consignment account will increase by Rs. 6400.

Problem on Invoice price method with stock & Overriding commission.

Illustration 16.20: X of Delhi Purchased 10,000 meters of cloth for Rs. 2,00,000 of which 5,000 meters were sent on consignment to Y of Agra at the selling price of Rs. 30 per meter. X paid Rs. 5,000 for freight and Rs. 500 for packing etc.

Y sold 4,000 meters at Rs. 40 per meter and incurred Rs. 2,000 for selling expenses. Y is entitled to a commission of 5% on total sale proceeds plus a further 20 per cent on any surplus price realized over Rs. 30 per meter.

3,000 meters were sold at Delhi at Rs. 30 per meter less Rs. 3,000 for expenses and commission. Owing to fall in market price, the stock of cloth in hand is to be reduced by 10 per cent.

Prepare the Consignment Account and Trading and Profit & Loss Account in Books of X and his account in the books of Y.

Solution:

In the books of X (consignor)

Consignment A/c

ParticularsRs.ParticularsRs.
To Goods sent on Consignment a/c1,50,000By Consignee a/c (sale)1,60,000
To Cash a/c (expenses)5,500By Consignment stock a/c27,990
To Consignee Y a/c (expenses)2,000By Goods sent on consignment a/c
To Consignee Y a/c (commission)16,000(loading reversed)50,000
To Stock reserve a/c9,000
To P&L a/c55,490
2,37,9902,37,990

Goods Sent on Consignment A/c

ParticularsRs.ParticularRs.
To Consignment a/c50,000By Consignment a/c1,50,000
To Trading a/c (cost of G. S. transferred)1,00,000
1,50,0001,50,000

Y (Consignee) A/c

ParticularRs.ParticularsRs.
To Consignment a/c1,60,000By Consignment a/c2,000
By Consignment a/c16,000
By Balance/bank1,42,000
1,60,0001,60,000

Trading and P&L A/c

ParticularsRs.ParticularsRs.
To Purchase a/c2,00,000By Sale a/c90,000
To G. P. a/c26,000By G. S. a/c1,00,000
By Closing stock (2000 × 20) – 10% less36,000
2,26,0002,26,000
To Selling expenses a/c3,000By G. P.26,000
To Net profit78,490By Consignment profit55,490
81,49081,490

(i) Commission

Sale 4000 × 401,60,000
(-) Invoice price 4000 × 301,20,000
Surplus40,000
5% on 1,60,0008,000
20% on 40,0008,000
16,000

(ii) Valuation of stock (unit 1000)

CostLoadingInvoice
Basic20,00010,00030,000
+ Freight packing (5500 × 5000) × 10001,100––1,100
21,10010,00031,100
(-) 10% due to fall2,1101,0003,110*
Valued at18,9909,00027,990

* 10% is reduced from total value alternatively it can be reduced from basic value 30,000. In that case closing stock will be Rs. 28,100, (Rs. 31,100 – 3,000). In that case profit will be more by Rs. 110.

Problem on Invoice price method with stock, Del credere commission. (Solved by Memorandum Column also)

Illustration 16.21 : H Ltd. forwarded on 1st July, 2005. 100 bicycles to Kale of Bombay to be sold on behalf of H. Ltd. The cost of one bicycles was Rs. 150 but the invoice price was Rs. 200 H. Ltd. incurred Rs. 1,000 on freight and insurance. Kale received consignment on 14th July, 2005 and accepted a 3 months draft drawn upon him by H. Ltd. for Rs. 10,000. Kale paid Rs. 400 as rent and Rs. 250 as insurance and by 31st December had disposed of 80 bicycles at Rs. 205 each.

Kale is entitled to a commission of 5 per cent on sales including del credere com mission of 1 %. Kale sold 20 bicycles on credit and was not able to recover sale proceeds of 5 bicycles because of insolvency of the debtor.

Give journal entries to record the above transactions in the books of H. Ltd. and of Kale. Give Ledger account in the books of H. Ltd. who close their accounts on 31st December.

Solution:

In the book of H. Ltd. (consignor)

Consignment A/c

ParticularsRs.ParticularsRs.
To Goods sent on consignment A/c20,000By Kale A/c (sales)16,400
To Cash A/c (freight & Insurance)1,000By Consignment stock A/c (20 bicycles)4,200
To Kale A/c (Rent & Insurance)650By Goods sent on Consignment A/c5,000
To Kale A/c (Commission)820(Loading reversed)
To Stock reserve A/c (20 × 50)1,000
To Profit trf. to P&L2,130
25,60025,600

Kale’s A/c

To consignment A/c16,400By B/R A/c10,000
By Consignment(Rent & Insu.)650
By Consignment (Commission)820
By Balance c/d OR Bank A/c4,930
16,40016,400

Goods sent on consignment A/c

To Consignment A/c5,000By Consignment A/c (Invoice value)20,000
(Loading reversed) .
To Trading/Purchase A/c15,000
(Cost transfer)
20,00020,000

Consignment stock A/c

To Consignment A/c4,200By balance c/d4,200
4,2004,200

Stock reserve A/c

By balance c/d1,000By Consignment A/c1,000
1,0001,000

Bills Receivable A/c

To Kale A/c10,000By cash/bank10,000
10,00010,000

Valuation of stock

ParticularsStock 20 bicycle
Invoice Value = 20 × 2004,000
Freight & insurance =200
4,200

Note:

  1. In the book of consignee there will be no change in accounts prepared in case of Invoice Price Method because closing stock & goods sent on Consignment have no entry in book of consignee.
  2. Abnormal loss will be calculated at cost price only and not at invoice price.
  3. In balance sheet stock – stock reserve i.e. 4,200 – 1,000 = 3,200 will be shown.

The same question can be solved by Memorandum Column Method as follows:

Memorandum column method

Consignment A/c

ParticularsInvoice

Price

Cost

Price

ParticularsInvoice

Price

Cost

Price

To Goods sent on Consignment20,00015,000By Kale A/c (Sales)16,40016,400
To Cash (Freight & Insurance)1,0001,000By Consignment stock4,2003,200
To Kale (Rent & Insurance)650650By loss as per invoice price value1,870
To Kale (Commission)820820
To Profit Transfer to P& L2,130
22,47019,60022,47019,600

Note: Memorandum column is not part of accounts, it is prepared to know what is profit on invoice price basis (also known as retail profit).

Problem on Invoice price method with stock & Damaged units stock

Illustration 16,22 : Mr. A of Mumbai consigned 100 units of a commodity to Mr. R of Delhi. The goods were invoiced at Rs. 150 so as to yield a profit of 50% on cost. Mr. A incurred Rs. 1,000 on freight and insurance. Mr. R incurred Rs. 500 on freight and Rs. 800 on rent. He sold 50 units for cash at Rs. 160 per unit and 20 units for Rs. 175 per unit on credit. He retained his commission of 5 per cent and 1 per cent of the del credere arrangements and remitted the balance on 31st March, 2000. Mr. R noticed that 10 units were damaged on account of bad packing and he could sell them only for Rs. 80 per unit after 31st March, A debtor for Rs. 1000 to whom goods were sold by Mr. R. became insolvent and only Rs. 0.50 in a rupee was recovered Mr. R sent an account sale on 31 st March, 2000 detailing transactions for the quarter ended on that date and remitted the balance due. Make necessary ledger accounts in the books of Mr. A assuming that Mr. A closes the books every 31st March. .

Solution :

Ledger of Mr. A

Dr.Consignment to Delhi A/cCr.
Rs.Rs.
To Goods sent on consignment a/c15,000By R’s a/c (sales)11,500
To Bank (freight, insurance)1,000By Goods sent on consignment a/c5,000
To R’s a/c (expense) (Freight 500 &(loading)
Rent 800)1,300By Abnormal loss398
To R’s a/c (commission) 6% of 11,500690By Consignment stock
To Stock reserve (20 units @ Rs. 50)1,000Good units 3,300
To Profit and loss a/c (profit onDamaged units 7524,052
consignment)1,960
20,95020,950

 

Dr.Goods sent on consignment A/cCr.
Rs.Rs.
To Consignment to Delhi a/c – loading5,000By Consignment to Delhi a/c15,000
To Trading a/c – transfer10,000
15,00015,000

 

Dr.R’s A/cCr.
Rs.Rs.
To Consignment to Delhi a/c (sales)11,500By Consignment to Delhi a/c (expenses)1,300
By Consignment to Delhi a/c (commission)690
By Bank (balance received)9,510
11,50011,500

Working notes:

1. Abnormal loss:Rs.
Cost of 10 units @ Rs. 1001,000
Add: Non-recurring expenses 1/10 × [1000+500]150
Hotel Cost of 10 units1,150
Less: Net realisable value
(10 × 80 = Rs. 800 – less 6% commission 48)752
Abnormal loss398

 

2. Valuation of closing stockRs.
Good units 20 × Rs. 1503,000
Add: 2/10 × 1500300
3,300
Damaged units (at lower of cost and net realisable value)752
4,052

Tutorial Notes

♦    AS-2 (Revised) issued by ICAI requires valuation of inventories at cost or net realizable value, whichever is lower.

♦    Cost means the cost of purchase, cost of conversion and other costs incurred in bringing the inventory to its present location and condition. Applying this criterion, we include proportionate non-recurring charges incurred by consignor / consignee.

♦    Net realizable value means the estimated selling price less costs of disposal and must be deducted from selling price to arrive at Net Realisable Value.

PRACTICE PROBLEMS

(Answers & Hints given at the end of the Chapter)

Cost Price Method

P.1 : Kay sent 500 articles to his agent Jay at an invoice price of Rs. 25 per articles and paid freight and cartage Rs. 1,000.

Jay sold 400 articles @ Rs. 40 per article and sent an account sales, deducting Rs. 200 for storage charges and Rs. 300 for selling expenses. He charged 10% commission on the gross sale proceeds and remitted the amount due to Kay.

Record the above mentioned transactions in Kay’s ledger showing the profit earned by the consignor.

P.2 : Shri Mehta of Bombay consigns 1,000 cases of goods costing Rs. 100 each to Shri Sundaram of Madras. Shri Mehta pays the following expenses in connection with consignment. Carriage, Freight & Loading Charges Rs. 5,000.

Sri Sundaram sells 700 cases at Rs.140 per case and incurs the following expenses, Clearing Charges Rs. 850, Storage Rs.1,700, Packing & Selling expenses 600.

It is found that 50 cases have been lost in transit and 100 cases are still in transit.

Sri Sundaram is entitled to a commission of 10% on gross sales.

Draw up the Consignment Account and Sundaram’s Account in the books of Sri Mehta.

P.3 : X of Calcutta sent, a consignment of 500 bicycles costing Rs. 100 each to Y of Bombay. Expenses of Rs. 700 met by the Consignor. Y of Bombay spent Rs. 1,500 for clearance and the selling expenses were Rs. 10 per bicycle.

Y   sold, 400 bicycle @ Rs. 160 each.

Y   was entitled to a fixed commission of Rs. 25 per bicycle sold plus an additional commission of one-fourth of the amount by which the gross sale proceeds less total commission thereon exceeded a sum calculated at the rate of Rs.125 per bicycle sold.

Y   sent the amount due to X.

You are required to show the Consignment Account and Y’s account in the book of X.

P.4 : Unit 10000, costing Rs. 20 (including transportation, etc.) are in consignment business. Consignee sold 8000 units and 1750 units are in stock. Loss is normal loss.

Value stock if (i) lost unit has no scrap value or

(ii) has a value of Rs. 5 per unit.

P.5 : Goods sent on consignment 10,000 units costing Rs. 50 each. Abnormal loss due to accident 1000 units. Goods Sold by the consignee 7000 units.

Value abnormal loss and closing shock if (i) scrap value is Nil or (ii) scrap value is Rs. 10 per unit.

P.6 : Goods sent on consignment 10,000 units costing Rs. 50 each. Abnormal loss due to accident 600 units. 496 of the total units is normal loss. Goods Sold by the consignee 7000 units.

Value abnormal loss and closing shock if (i) scrap value is Nil or (ii) scrap value is Rs. 10 per unit for all lost units.

Invoice Price Method

P.7 : Find the Invoice value of goods sent, Value of closing stock & stock reserve in following cases:

(a)  Goods costing Rs. 300/- invoiced to consignee at 2596 profit on cost. 5,000 units were sent out of which 4,000 units were sold.

(b)  Goods costing Rs. 300/- invoiced to consignee at 2596 profit on Invoice Price. 5,000 units were sent out of which 4,000 units were sold.

(c)  Goods are Invoiced at Rs. 600/- so as to give a profit of 20% on Invoice Price. 3,000 units were sent out of which 2096 are in stock.

(d)     Goods are Invoiced at Rs. 600/- so as to give a profit of 20% on Cost. 3,000 units were sent out of which 20% are in stock.

P.8 : Dinesh of Kolkata consigned 100 transistor sets costing Rs. 500 each to Suresh of Patna. The invoice proforma was made at Rs. 600 per set.

Suresh was entitled to a commission of 7&1/2% on sales plus 2 & 1/2% del credere commission and 10% of any excess price realised over invoice price. Suresh was to bear all expenses incurred after the goods reached his godown.

While sending the goods, Dinesh paid Rs. 1,500 as forwarding expenses and insurance.

In transit, 10 transistor sets were damaged and Dinesh recovered Rs. 4,000 from the insurance company.

Suresh took delivery of remaining transistor sets paying Rs. 4,500 as freight, cartage, etc.

Suresh sold 70 transistor sets at Rs. 800 each, 30 of them on credit. Out of which the proceeds of 3 transistor sets could not be recovered because of the disappearance of the customers.

He paid Rs. 500 as storage and selling expenses.

Suresh sent a bank draft for the amount due to Dinesh.

Show the consignment account and Suresh’s account in the books of Dinesh.

P.9 ; Reema consigns goods to Sunita to be sold at above invoice price, Sunita is to get commission of 5% on sales at invoice price, plus 25% of any surplus price realized.

Reema received from Sunita an advance of 75% of the invoice price (as security deposit), the accounts being settled by Bank Drafts immediately on sales.

During the year Reema consigned to Sunita goods worth Rs. 3,60,000, the invoice price of which was Rs. 5,00,000 this includes freight.

Sales by Sunita during the year amounted to Rs. 4,30,000.

Goods unsold on 31.03.2011 with Sunita were of invoice price of Rs. 1,50,000 (cost including freight Rs. 1,00,000). Reema had received from Sunita by Bank Draft during the year Rs. 90,000, certain remittances being in transit on 31,03.2011.

Show the consignment to Sunita A/c and Consignee’s (Sunita) A/c in the books of Reema.

P.10 : ‘X’ of Delhi purchased 10,000 pieces of Sarees @Rs. 100 per Saree. Out of these Sarees, 6000 were sent on consignment to ‘Y of Agra at a selling price of Rs. 120 per Saree. The consignor paid Rs. 3000 for packing and freight.

T’ sold 5000 Sarees at Rs. 130 per Saree and incurred Rs. 1000 for selling expenses and remitted Rs. 5,00,000 to Delhi on account. They are entitled to a commission of 5% on total sales plus a further 20% commission on any surplus price realized over Rs. 125 per Saree.

3000 Saree were sold at Delhi at Rs. 110 per Saree.

Prepare the consignment Account in the books of ‘X’ and their account in the books of the agent ‘Y’ of Agra.

ANSWERS AND HINTS FOR

Practice Problems

P. No.Answers & Hints
1.Final dues Rs. 13,900 paid by Jay to Kay; Profit Rs. 3,100, Closing stock Rs. 2,700
2.Final dues Rs. 85,050; Profit Rs. 11,700, Abnormal loss Rs. 5,250; Closing stock 10,500+ 15,900 = Rs. 26,400
3.Final balance received Rs. 47,700; Profit Rs. 7,440; Commission Rs. 10,800; Stock Rs.1 0,440
4.Closing Stock (i) Rs. 35,897.44 (ii) Rs. 35,673.08
5.Closing Stock (i) Rs. 1,00,000 (ii) Rs. 1,00,000 Abnormal loss (i) Rs. 50,000 (ii) Rs. 40,000
6.Closing Stock (i) Rs.l,04,167 (ii) Rs. 1,03,333 Abnormal loss (i) Rs. 31,250 (ii) Rs. 25,000
7.(a) Invoice value of Goods sent Rs. 18,75,000; Stock Rs. 3,75,000, Stock reserve Rs. 75,000;
(b) Invoice value of Goods sent Rs. 20,00,000; Stock Rs. 4,00,000, Stock reserve Rs. 1,00,000;
(c) Invoice value of Goods sent Rs. 18,00,000; Stock Rs. 3,60,000, Stock reserve Rs. 72,000;
(d) Invoice value of Goods sent Rs. 18,00,000; Stock Rs. 3,60,000, Stock reserve Rs. 60,000;
8.Suresh sent to Dinesh (final dues) Rs. 44,500 ; Profit Rs. 9,450
9.Profit Rs. 1,32,500; Sunita A/c Balance Advance (Cr.) Rs. 1,12,500; Cash in transit Rs. 40,000; Commission Rs. 37,500
10.Commission Rs. 37,500 ; Consignment profit Rs. 1,09,000.

*This article contains all topics about Consignment Accounting.

For notes on all CA foundation topics, you can visit this article CA foundation note

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