What is Consignment Account | How Does Consignment Work | Purpose and Benefits of Consignment Account | How to Use the Consignment Account | Difference Between the Sale and Consignment |

👉 Overview of consignment account

The Consignment Account is an essential tool in accounting that helps businesses track and manage consignment transactions between a consignor and a consignee. When goods are consigned to a party for the purpose of selling them on behalf of the consignor, the Consignment Account plays a crucial role in recording the related financial transactions.

**What is Consignment Account?**

The Consignment Account is a specialized account used to record all the transactions associated with consigned goods. It enables the consignor to keep track of the movement, sales, and financial implications of the consigned goods throughout the consignment period.

**How Does Consignment Work?**

To illustrate the concept of consignment, let's consider an example. Suppose a jeweler manufactures various jewelry pieces, including those made from diamonds, gems, silver, gold, etc. However, the jeweler lacks the necessary selling experience and a wide customer base. To overcome this, the jeweler decides to consign the jewelry to different jewelry shops. The jeweler becomes the consignor, and the jewelry shops become the consignees. The consignees are responsible for selling the jewelry on behalf of the consignor.

**Purpose and Benefits of Consignment Account:**

The Consignment Account serves several purposes and provides several benefits:

1. **Transaction Tracking:** The Consignment Account allows the consignor to keep a record of the movement of consigned goods, sales made by the consignee, and related financial transactions. This enables the consignor to have visibility into the progress of the consigned goods and evaluate the performance of the consignee.

2. **Financial Monitoring:** By maintaining a Consignment Account, the consignor can monitor the profitability of consigned goods. It helps the consignor assess the financial impact of consignment arrangements and make informed decisions regarding pricing, inventory levels, and consignee relationships.

3. **Commission Calculation:** The Consignment Account facilitates the calculation of commissions payable to the consignee based on sales or other agreed-upon terms. The consignor can determine the commission amount owed to the consignee, ensuring fair compensation for their sales efforts.

4. **Loss Evaluation:** In the consignment process, there may be instances of normal or abnormal losses of goods. The Consignment Account helps assess the impact of such losses on profitability and inventory valuation. It enables the consignor to make appropriate adjustments and take necessary actions to mitigate losses.

5. **Inventory Valuation:** The Consignment Account also plays a role in valuing the consigned goods held by the consignee. It helps determine the value of consigned inventory for accounting and reporting purposes, considering factors such as transportation costs, packaging expenses, and any normal or abnormal losses incurred.

**How to Use the Consignment Account:**

Using the Consignment Account involves the following steps:

1. **Initial Recording:** When the consignor sends goods to the consignee, the Consignment Account is debited, representing an increase in the consignor's asset. The corresponding entry is made in the Goods Sent on Consignment Account.

2. **Expense Recording:** If the consignor incurs any expenses related to sending the goods to the consignee, such as packaging, freight, carriage, insurance, octroi, or import duty, these expenses are debited to the Consignment Account. The corresponding credit entry is made to the Cash/Bank/Supplier Account.

3. **Sales Recording:** When the consignee sells the goods, the Consignment Account is credited for the sales amount. The corresponding entry is made

 in the Consignment Sales Account or the Consignee's Personal Account.

4. **Commission Calculation:** Based on the agreed-upon commission rate, the commission payable to the consignee is calculated. The Consignment Account is debited, and the Consignee's Personal Account or Commission Expense Account is credited.

5. **Profit or Loss Calculation:** At the end of the consignment period, the consignor determines the profit or loss incurred. The Consignment Account is adjusted accordingly, reflecting the final outcome of the consignment arrangement.

By following these steps and maintaining accurate records in the Consignment Account, both the consignor and consignee can effectively track their positions and evaluate the financial implications of consignment transactions.

It is worth mentioning that the specific entries and treatments in the Consignment Account may vary based on the nature of the consignment agreement and applicable accounting standards or regulations. Therefore, it is advisable to consult professional accountants or refer to relevant accounting guidelines for accurate and compliant accounting practices related to consignment accounts.

Example of Consignment 

Suppose, A Jeweler make various jewelry from diamonds, gems, silver, gold, etc. He manufactures all the jewelry at his store. He wants to sells his jewelry near him, he don't have any selling experience to sells the jewelry. So, he decided to consigned the jewelry to the different jewelers shops at some commission to them. Now the shoppers will sell the consigned jewelry and send the account sales to the Consignor to get them commission, that's just the consignment is.

This type of business is done in various business enterprises such as consignment house, consignment furniture, consignment groceries, etc.

 Difference Between the Sale and Consignment

 

 Consignment Inventories 

Inventory is to determine the value of goods at which value to be carried in the financial statements until the revenue recognized. Consignment inventories are maintain by both the parties consignor as well consignee. This is the most important component of the commission distribution to the consignee. Proper valuation of consigned goods bears on the profits and consignees commission. 

In consignment inventories cost of goods means the value of goods and the expenses incurred to the consignor till the goods reached the premises of the consignee. This expenses are packing, freight, carriage, insurance, octroi, import duty. Expenses of consignee are also recognized but this expenses should be non-recurring such as selling cost, advertisement, transport charges, etc. The recurring expenses should be ignored of the consignee.

 Normal Loss to goods 

In the consignment goods sometime goods may get loss or damage and some are unavoidable and could affects the valuing of the inventories.  Suppose, 50 furniture are consigned to a shopper, the cost per furniture is $20 and expenses $500 of transport. It is noted that 10 furniture are damage is unavoidable. 

Now, we have to find the cost per furniture to get the loss amount. 

50*20 + 500 = $1,500 Total cost 

To find per cost dividing the total cost by the total quantity.

1,500/50 = 30 per furniture cost 

loss of furniture = 10*30 = 300

But, no entry is recorded for normal loss and same to the expenses in valuing the inventories.

 Abnormal Loss on goods

Abnormal loss on goods means if any accidental or unnecessary goods loss, sometimes goods may not sold at the fastest speed this is because of abnormal loss to the goods. How abnormal loss incur, when the demand for the goods became less in the market, seasonal product, market influence, substitute effect, etc. 

Suppose, An mobile phone manufacturer consigned phone with the consignee. But in the market after some year the new phone was launched and the market demand for the old phone were less demanded. The old phone is getting sold but not in initial selling speed. Therefore, the cost of maintenance is increasing to consignee. Thus the phones left with the consignee is also the loss therefore is loss is called Abnormal loss. 

Calculation of Abnormal Loss in inventorying the goods

Let 10 mobile phone consigned at $5,60,000 and packing $500. After some months 2 phone left unsold. 

Cost of unsold phone?

Total phone consigned = 5,60,500/10 =56,050

left 2 cost = 56,050*2 = 1,12,100

Expense = 2*500 = $1,000

Total Abnormal Loss is of $ 1,13,100

Commission on Consignment 

Consignor pays the commission to the consignee when he sold the consigned goods. Three types of commission can be provided by the consignor to the consignee, as it depends upon the agreement between them. 

1. Ordinary Commission 

Ordinary commission is the simply commission is given. It is based on the fixed percentage on the gross sales. Consignor pays with regards to total sales whether it is credit sales or not total sales must have. Consignor does not get any protection from the bad debts of consigned goods. If the goods gets lost, theft or destroy consignee will not borne any loss on the goods it will borne by the consignor.

 2. Del-credere commission

Del-credere commission means to give additional or extra commission on credit sales, this is because to increase the sales and to encourage the consignee. Consignor  provide this commission to lower the risk of the consigned goods. If the loss occurs the consignor is not liable for the loss the consignee liable. It is calculate on the total sales unless there is an agreement between the consignor and consignee to provide it on credit sales or total sales. Sometimes it is calculated on credit sales but generally calculated on total sales. In the question given calculate the del-credere commission on credit sales then calculate on credit sales only. and if question is silent about where to calculate then, calculate on total sales.

3. Over riding commission

This commission is provided because to promote, advertise the product in the market. Introducing new product in the market it will need marketing, promotion, branding to aware the customer about the product. If everything is done by the consignee the consignor will give an extra commission to promote the product at higher price. It is calculated on total sales or the difference between actual sale and sales at invoice price or any specified price. 

For example: If the price of the goods is $149 which is an invoice price and the consignee did the digital marketing of $20. He sold goods at $199.

The consignee will get over riding commission on the difference on actual price and invoice price i.e ⇒ 199 (-) 149 + 20 = $30