Accounting For Special Transactions
Unit 1
Consignment
Meaning
 Consignment Account deals with a situation where one person sends goods to another
person on the basis that goods will be sold on behalf of and at the risk of the former.
Points to be noted
 Principal - The party which sends the goods is called Consignor or Principal.
 Agent- The party to whom goods are sent is called consignee or agent.
 Ownership of the property- ownership of the goods remains with the consignor;
consignee does not become the owner even though they are in his possession
 Proforma Invoice- Principal does not send an invoice to the agent. He sends only a
proforma invoice which is like an invoice but not really one. It provides information regarding
particulars of the goods sent.
 Expenses- The agent recovers from the principal all expenses incurred by him on the
consignment. This can be changed by agreement between two parties.
 Advance to Principal- Agent usually gave an advance to principal in the form of bill of
exchange or cash. It is adjusted against the sale proceeds of the goods.
 Commission- agent receives commission for the work. Commission is calculated on the
basis of gross sale.
 Ordinary Commission- here agent is not responsible for any bad debt that may arise
 Del-credere Commission – here agent is responsible for bad debts. It is calculated on total
sales, not merely on credit sales until and unless agreed
e.g.
Cash sales =50000, credit sales=50,000 del-credere 2%calculate Del – credere
commission
Solution
Total sales= cash sales + credit sales
50,000 + 50,000=100,000
Explanation – Here commission is charged on Total Sales because question is silent
herein case question specifically says del-credere commission to be
charged on credit sales then commission =1000 i.e. 2% on 50,000.
 Accounts Sales-Periodically the agent sends to the principle a statement called Account
Sales. It sets out the sales made by the agent, the expenses incurred on behalf of the
principal, the commission earned by the agent and the balance due to principal
 Ascertainment of profit or loss – firm usually likes to ascertain the profit or loss on each
consignment
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 Distinguish Between Consignment and Sale
S.No. Consignment Sale
1 Ownership of the goods rests with the The ownership of the goods
consignor till the time they are sold by the transfers with the transfer of goods
consignee, no matter the goods are from the seller to the buyer.
transferred to the consignee.
2 The consignee can return the unsold goods Goods sold are the property of the
to the consignor. buyer and can be returned only if
the seller agrees
3 Consignor bears the loss of goods held It is the buyer who will bear the loss
with the consignee. if any, after the delivery of goods.
4 The relationship between the consignor The relationship between the seller
and the consignee is that of a principal and the buyer is that of a creditor
and agent. and a debtor.
5 Expenses done by the consignee to receive Expenses incurred by the buyer are
the goods and to keep it safely is borne by to be borne by the buyer itself after
the consignor. the delivery of goods.
 Accounting Treatment in the books of consignor
Journal Entries
I. When goods are sent at cost
(a) On sending the goods on Consignment
Consignment A/c Dr (with cost of goods sent)
To Goods sent on consignment A/c
(Being goods sent on consignment)
(b) On incurrence of expenses by consignor
Consignment A/c Dr (With amount of expense incurred by consignor)
To Cash/ Bank A/c
(Being the expenses incurred)
(c) On receiving security from consignee
Cash/Bank/Bill Receivable A/c Dr (amount received as security from consignee)
To Consignee’s A/c
(Being Security Received from consignee)
(d) On getting the bills receivable (received from consignee), discounted
Bank A/c Dr (Amount of net proceeds)
Discount A/c Dr (Amount of Discount)
To Bills Receivable A/c
(Being the B/R discounted)
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(e) On receiving the goods returned from consignee
Goods sent on consignment A/c Dr
To Consignment A/c
(Being the goods returned by the consignee)
(f) On Incurrence of expenses by consignee
Consignment A/c Dr (With amount of expenses incurred by consignee)
To Consignees A/c
(Being Sales made by consignee)
(g) On sales being made by consignee
Consignee A/c Dr (With the amount of sales proceeds)
To Consignment A/c
(Being Sales made by consignee)
(h) On making the commission due to consignee
Consignment A/c Dr. (With the amount of commission earned by
Consignee)
To Consignee’s A/c
(Being the commission due to consignee)
(i) On charging bad debts if consignee is not entitled to del-credere commission
Consignment A/c Dr. (With the amount of Bad Debts)
To Consignee’s A/c
(Being the bad debts charged)
(j) On receiving the balance due from the consignee
Cash/Bank/Bills receivable A/c Dr. (With the amount of balance)
To consignee’s A/c
(Being the balance due from the consignee)
(k) On accounting for the unsold stock with the consignee
Consignment stock A/c Dr. (with the value of unsold stock)
To consignment A/c
(Being unsold stock with the consignee brought into account)
(l) On accounting for abnormal loss of goods.
(i) Profit & Loss A/c Dr. (with irrecovered loss)
Insurance company’s A/c Dr. (with the claim admitted by
insurance company)
To consignment A/c
(Being abnormal loss accounted for)
(ii) Cash/Bank A/c Dr. (With the claim recovered)
To insurance Co.’s A/c
(Being the claim received)
(m) On accounting for profit/loss on consignment
(i) In case of Profit
Consignment A/c Dr. (with the amount of profit)
To profit & Loss A/c
(Being the profit on consignment transferred)
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(ii) In case of loss
Profit & Loss A/c Dr. (with the amount of loss)
To Consignment A/c
(Being the loss on consignment transferred)
(n) On transfer of goods sent on consignment account
Goods sent on consignment A/c Dr.
To trading A/c
(Being goods sent on consignment account transferred to trading account)
(o) On transfer of discount account (raised on discounting a bills receivable
received from consignee)
Profit & Loss A/c Dr.
To discount A/c
(Being the discount account transferred to profit & loss account)
II. When goods are sent at cost plus profit
In such a case, the following four additional entries besides aforesaid entries, are
required to be passed to eliminate loading (i.e. Excess of Invoice price over cost price)
(p) To eliminate the profit element included in goods sent on consignment
Goods sent on Consignment A/c Dr. (with the amount of profit included in goods
sent in unsold closing stock)
To consignment A/c
(Being profit included in Goods sent @ Rs. eliminated)
(q) To eliminate the profit element included in closing stock lying with the
consignee
Consignment A/c Dr. (with the amount of profit included in unsold closing
stock)
To Consignment Stock Reserved A/C
(Being profit included in unsold closing stock @ Rs…. eliminated)
(r) To eliminate the profit element included in opening stock lying with the
consignee
Consignment Stock Reserve A/C Dr. (with the amount of profit included in
unsold opening stock)
To Consignment Stock A/C
(Being profit included in unsold opening stock @ Rs…. eliminated)
(s) To eliminate the profit element included in Goods returned by consignee
Consignment A/c Dr. (With the amount of profit included in
goods returned)
To Good sent on consignment A/c
(Being profit included in goods returned @ Rs…. eliminated)
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 Accounting Treatment in the Book of the Consignee
Journal Entries
(a) On providing security to consignor
Consignor’s A/c Dr. (With the amount of security to consignor)
To Cash/Bank/Bill payable A/c
(Being the security provided to consignor)
(b) On incurring expenses on behalf of consignor
Consignor’s A/c Dr. (With the amount of expenses incurred)
To Cash/Bank A/c
(Being the expenses incurred on behalf of Consignor)
(c) On sale of goods on behalf of consignor
Cash A/c Consignment Debtors A/c Dr. (with the amount of sales)
To Consignor’s A/c
(Being the goods sold on behalf on consignor)
(d) On receipt of payment from consignment debtors
Cash/bank A/c Dr, (with the amount collected from
Consignment debtors)
To Consignment Debtors A/c
(Being the amount collected from Consignment debtors)
(e) On non-relisation of any book debts
(i) Because of dispute regarding quality, quantity, delivery etc.
Consignor’s A/c Dr.
To Consignment Debtors A/c
(Being the debts not realized due to …)
(ii) Because of insolvency of customer
If del-Credere commission is given
Bad debts A/c Dr.
To Consignment Debtors A/c
If del-Credere commission is not given
Consignor’s A/c Dr.
To Consignment Debtors A/c
(f) On making the commission due from consignor
Consignor’s A/c Dr. (With the amount of commission due from
Consignor)
To Commission A/c
(Being the commission due from consignor)
(g) On remitting the balance to consignor
Consignor’s A/c Dr. (with the amount of balance remitted to the
Consignor)
To cash/Bank A/c
(Being balance remitted to the Consignor)
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(h) On transfer of commission account
Commission A/c Dr. (with the amount of balance remitted to the
Consignor)
To Profit & Loss A/c
(Being the commission account closed)
(i) On transfer of bad debts account
Profit & Loss A/c Dr.
To bad debts
(Being the bad debts account closed)
(j) On discharging bills payable (if any accepted)
Bills payable A/c Dr. (with the amount of bill payable discharged)
To cash A/c Bank A/c
(Being the bills payable discharged)
 Valuation of Stock
The principle is that stock should be valued at cost or Net Realisable Value whichever
is lower But in Consignment, Cost means not only the cost of goods but
Cost of goods
Add: Packaging expense
Freight
Cartage
Insurance in transit
Octroi etc.
Total = Cost of stock
(It does not include any expenses incurred
after receiving goods at consignee’s premises)
 If details are not given for valuing stock then expenses incurred by consignor
should be treated as a part of cost while those incurred by the consignee should
be ignored.
 If the expected selling price of stock in hand is less then the cost the value put on
the stock should be expected net selling price only
i.e. Selling Price Expected
Less: Delivery Expenses
 Goods Invoiced above cost
 Sometimes the consignor sends goods at a price which is higher than the Cost price,
such price is known as Invoice price
 Difference between the Invoice Price and Cost Price is known as Loading
 It is not necessary that selling price and invoice price will be same unless consignor
directs to sell the goods at the invoice price.
 Hence, if entries are first made on invoice basis, the effect of the loading (i.e., amount
added to arrive at the invoice price) must be removed by additional entries
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Goods sent on Consignment A/c Dr.
To Consignment to Consignee A/c
[Entry (i) reversed to the extent of loading in order to debit the Consignment A/c on cost
basis].
Consignment to Consignee A/c Dr.
To Stock Reserve Account
(The amount of loading included in the value of the closing stock is unrealised profit –
hence Reserve is created by debit to the Consignment Account).
For e.g.
Anil sent goods to Sunil at cost +20% costing 200,000
Invoice value of the goods will be
(a) Rs. 2, 50,000 (b) Rs. 2, 40,000 (c) Rs. 3, 00,000 (d) None
Ans. 2, 40,000
Explanation Cost = 100 so our Invoice price =100+20%=120
Therefore invoice value is equal to 200,000 + 20%=240,000
Here loading in goods is 40,000 i.e.(240,000-200,000)
 Valuation of unsold stock with consignee
Particulars Units Value
Step 1 Compute cost of unsold stock
A) Cost of goods sent by the consignor
B) Add: All expenses incurred by consignor
C) Total Cost of goods sent (A+B)
D) Less: Cost of goods not reached the city of the consignee
a) Goods in transit
b) Goods lost in transit
E) Cost of goods reached the city of the consignee (C-D)
F) Add: on Recurring expenses incurred by consignee
G) Cost of goods received by Consignee (E+F)
H) Less: Expected Normal Loss (units only)
I) Cost of goods available for sale (G-H)
J) Cost of unsold stock
Step 2 Compute Net Realizable Value
Realization Expense (e.g. commission on sales)
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Step 3 Value of unsold stock
Cost or Net Realizable value whichever is lower
E.g.
Goods sent by Mr. A to his agent Mr. B -10,000 units @ Rs20 per unit
Mr. A’s expenses -50,000
Agent took delivery and brought the goods to his godown after incurring expenses @ Rs
1 per unit
Goods sold by Agent – 7,300 units @ Rs 30
Agent Commission- 5%
Required calculate the amount of closing stock
Case (a) If no other information is given
Case (b) If owing to fall in market price, the value of normal stock is to be reduced by
10%
Case (c) If owing to depression in the market a special trade discount of 10% is to be
allowed to sell normal stock.
Solution:
Case a)
Particulars Units Rs
A) Cost of goods sent 10,000 200,000
B) Consignor’s Expenses ------- 50,000
C)Total Cost of Goods Sent (A+B) 10,000 250,000
D) Add:consignee’s non-recurring expenses ------- 10,000
E) Cost of goods received by consignee 10,000 2,60,000
F) Cost of unsold stock 260,000*2,700/10,000) 2,700 70,200
Case b)
Cost of closing stock 70,200
Less:10% 7,020
Value of closing stock to be brought into account 63,180
Case c)
Cost of closing stock 70,200
Net Realizable value
A) Gross Realizable Value (2,700 @ Rs30 *90%) 72,900
B) Less: Realization expense (Agent’s commission)
(15% of Rs.72,900) 3,645
C) Net Realizable Value (A-B) 69,255
Value of closing stock to be brought into account (Cost or NRV 69,255
whichever is lower)
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 Types of losses
1) Normal Loss 2) Abnormal loss
Normal loss is an unavoidable loss due to inherent features of the goods
(E.g. evaporation normal leakage/spoilage)
Treatment: It is treated as a part of cost by inflating the cost per unit
No journal entry is passed to account such loss
Treatment of Normal Loss.
E.g.
1000 kg apples are consigned to wholesaler for Rs 2 per kg + expense 500
Normal loss 10%
Closing Stock 50 units .Calculate the amount of Closing stock.
Solution:
Particulars Units Rs.
Cost of Goods Sent 1000 2000
Expense -------- 500
Less: Normal loss(10% of 1000) 100
Refer formula given above
Cost per unit = =2.78
Closing Stock =Units Cost per unit
= 50 2.78= Rs.139
 Abnormal Loss
Abnormal loss is an avoidable loss which occurs due to abnormal factors like fire, theft,
abnormal spoilage/breakage/pilferage etc. and not due to inherent nature of goods.
Treatment – It is not treated as a part of cost.
Valuation- Calculated same as value of Unsold Stock
Case 1) Calculation of Abnormal Loss during transit
= Cost of goods sent + Consignor’s proportionate expenses
Proportionate Expenses =
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Case 2) Calculation of Abnormal Loss in Consignee’s Godown
A) Cost Price of Goods Lost in Consignee’s Godown
B) Add: Consignor’s Proportionate Expenses
C) Add: Consignee’s Proportionate Non-Recurring Expenses
Proportionate Expense:
.D) Cost of Abnormal Loss in Consignee’s Godown (A+B+C)
E.g.
Mr. A sent goods to Mr. his agent – 10,000 units @ Rs.20 per.unit
Mr. A’s forwarding and insurance expenses –Rs.50, 000
Goods fully damaged in transit ---200 units (Insurance Co. paid 80% of loss)
Agent took delivery and brought the goods to his godown after
expenses @ Rs.1 per unit
Goods sold by agent-7,300 units @ Rs.30
Required: Calculate the amount of Closing Stock and Net Loss incurred on goods fully
Damaged in transit.
Solution:
Statement showing the Calculation of an Unsold Stock
Particulars Units Rs.
A) Cost of goods sent by the consignor 10,000 2,00,000
B) Add: Expenses incurred by consignor 50,000
C) Total Cost of goods sent (A+B) 10,000 2,50,000
D)Less: Cost of goods not reached the city of the consignee
Goods lost in transit 200 5,000
E)Cost of goods reached the city of the consignee (C-D) 9,800 2,45,000
F) Add:Non Recurring expenses incurred by consignee 9,800
G) Cost of goods received by Consignee (E+F) 9,800 2,54,800
H) Less: Expected Normal Loss (units only) ----
I) Cost of goods available for sale (G-H) 9,800 2,54,800
J) Cost of unsold stock 2,500 65,000
Calculation of Net Loss on Goods Lost in Transit
Particulars Units Value
A.Cost of Goods lost in transit 5,000
B Less: Insurance Claim (80% of Rs.5,000 4,000
C Net Loss 1,000
 Commission:
 Ordinary Commission:
It is based on Fixed Percentage of the gross sales proceeds made by the consignee.
This type of commission does not give protection to the consignor for Bad Debts and is
provided on Total sales
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 Del-Credere Commission:
Additional Commission paid by the Consignor to the Consignee for bearing the loss on
account of Bad Debts, if any, arising out of credit sale of consignment goods.
It is calculated on Total Sales unless there is an agreement between the Consignor and the
Consignee to provide it on Credit Sales
 Over-Riding Commission:
Over Riding Commission is an extra commission allowed by the Consignor to the Consignee
to promote sales at Higher Price then price fixed by the Consignee to encourage the
consignee to put hard work in introducing new product in the market.
Calculation: Depending on the terms of agreement it may be calculated on the
Actual Total Sales
OR
Difference between Actual Total Sales & Sales at Special Selling Price or Invoice
Price
In Absence of any such Agreement
Over-Riding Commission
 Return of the Goods from the Consignee
Reasons: Poor Quality
Not up to Specimen
Destroyed in Transit
Valuation: Price at which it was consigned to the Consignee.
(Expenses incurred by the consignee to send the goods back to the Consignor are
not taken into account because only those expenses are considered which help to
bring the goods into present location and condition i.e. saleable conditions.
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