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ACCOUNTING
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CONSIGNMENT ACCOUNTS
Consignment occurs when goods are sent by their owner (the consignor) to an agent (the
consignee), who undertakes to sell the goods. Consignment deals are made on a variety of
products - from artwork, to clothing, to books. In recent years, consignment shops have become
rather trendy, especially those offering specialty products, infant wear and high-end fashion
items. Therefore,
Consignor is a business or person who makes a consignment to consignee.
Consignee is a business or person that holds consignors goods for sale and acts as
consignors agent in selling the goods.
Consigned inventory includes goods shipped by a consignor to the consignee, who acts as an
agent in selling the goods.
The consignor continues to own the goods until they are sold, so the goods appear
as inventory in the accounting records of the consignor, not the consignee. In other words,
goods on consignment are included in the inventory of the consignor (i.e., seller) while they are
excluded from the consignees (i.e., buyers) inventory. Consignee does not own the inventory
but agrees to exercise due diligence in holding and selling consigned inventory.
Differences between sale of goods and consignment
The major differences between a sale and consignment are listed in the table below:
Sale
Ownership
Consignment
Transferred to the buyer along with Property of the consignor (seller) until
the transfer of goods.
consigned inventory is sold by the
consignee (reseller).
Goods sold on Buyer is a debtor of the seller. Trade Consignee is a debtor of the
credit
receivables and trade payables consignor. Agent
and
principal
relationship.
relationship.
Return of goods Buyer cannot return goods unless Can be returned to seller (consignor)
they are defective or seller agrees to because consigned inventory is
take them back.
property of the consignor until it is sold
by the consignee.
Goods lost after Buyers loss.
delivery
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Worked example:
Friends Company, a manufacturer of valves, ships a consignment of gas valves to a retail store
BestHome. In this case, Friends Company is a consignor while BestHome is a consignee.
Friends Company pays freight costs while BestHome pays local advertising costs and credit
card processing fees that are reimbursable from Friends Company. By the end of the period,
BestHome sells half of the consigned goods , notifies Friends Company of the sales, retains a
15% commission, and remits cash due to Friends Company.
1. Shipment of consigned inventory:
Friends Company ships gas valves costing $7,000 on consignment to BestHome. To record
the shipment of consigned inventory, Friends Company makes the following journal entry:
Account Titles
Inventory (Consignments)
Debit
$7,000
Credit
$7,000
BestHome does not make any journal entry. Mere receipt of the consigned goods does
not make the consignee a debtor of the consignor. In addition, the consignee does not
record the goods as an asset in its books as such goods is the property of the consignor
until it is sold.
2.2. Accounting for payment of freight costs by consignor
2. Payment of freight costs by consignor:
Friends Company shipped the gas valves to BestHome through a third-party shipping
company, which charged Friends Company $600 for shipping goods from the factory to the
consignee (i.e., BestHome). To record the shipping expense, Friends Company makes the
following journal entry:
Account Titles
Inventory (Consignments)
Trade Payable (or Cash)
Debit
Credit
$600
$600
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Friends Company does not make any journal entry until it is notified by the consignee (e.g.,
receives an Account Sales Report). Usually a consignee is entitled to be reimbursed for
expenses incurred in connection with the consignment (i.e., it depends on the consignment
agreement). Such expenses may include credit card processing fees, storage and insurance
costs, unloading charges, local advertising costs, etc.
BestHome paid $1,000 cash for local advertising costs. The consignee would make the
following journal entry:
Account Titles
Debit
Trade receivable (from Friends Company) $1,000
Cash
Credit
$1,000
Debit
Credit
$8,000
$8,000
Debit
(from
Friends
Credit
$160
$160
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BestHome notifies Friends Company of the sales and expenses by sending an Account
Sales Report, retains a 15% commission, and remits cash due to Friends Company.
Friends Company makes the following journal entry:
Account Titles
Cash
Debit
Advertising Expense
$1,000
Commission Expense
$1,200
$160
Credit
$5,640
$8,000
Debit
Credit
$8,000
receivable
(from Friends
Company)
Commission Revenue
Cash
$1,160
$1,200
$5,640
Credit
$3,800
The cost of goods sold in this example includes not only 50% of the original inventory cost
(i.e., $3,500 = $7,000 x 0.50) but also 50% of the shipping expense (i.e., $300 = $600 x
0.50). BestHome does not make any journal entry.
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Consignor (Seller)
Benefits
Risks
Consignee (Buyer)
Operational savings
No inventory sales
inventory
Extra
4. Consig
Points to remember:
Consignor remains the owner of goods even after sending to consignee.
Consignor does not send any Invoice rather a Performa invoice.
The Amount of Sales belongs to Consignor.
All the exp. are to be borne by Consignor. If borne by consignee, recoverable
from consignor.
Consignee entitled to Commission.
Consignee entitled to de-credere commission if he is responsible for bad debts.
Consignee sends a statement called Account Sales, periodically.
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In order to keep complete record of consignment transactions, the consignor maintains the
following accounts:
* Consignment Account
* Consignee's Account
* Goods sent on consignment Account
The following entries are made in the books of the consignor for goods sent at proforma
invoice price or cost price:
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Bank A/C...................Dr.
To Bills receivable
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12.For
goods
sent
on
consignment
transferred
to
trading
account(by
1. Nature
Joint venture: It is a temporary partnership business without a firm name.
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2. Parties
Joint venture: The parties involving in joint venture are known as co-ventures.
Consignment: Consignor and consignee are involving parties in the consignment.
3. Relation
Joint venture: The relation between co-ventures is just like the partners in partnership firm.
Consignment: The relation between the consignor and consignee is 'principal and agent'.
4. Sharing Profit
Joint venture: The profits ans losses of joint venture are shared among the co-ventures in
their agreed proportion.
Consignment: The profits and losses are not shared between the consignor and consignee.
Consignee gets only the commission.
5. Rights
Joint venture: The co-ventures in a joint venture have equal rights.
Consignment: In consignment, the consignor enjoys principal's right whereas consignee
enjoys the right of agent.
6. Exchange Of Information
Joint venture: The co-ventures exchange the required information among them regularly.
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Consignment: The consignee prepares an account sale which contains a details of business
activities carried on and is being sent to the consignor.
7. Ownership
Joint Venture: All the co-ventures are the owners of the joint venture.
Consignment: The consignor is the owner of the business.
9. Basis Of Account
Joint venture: Cash basis of accounting is applicable in joint venture.
Consignment: Actual basis is adopted in consignment.
10. Continuity
Joint venture: As soon as the particular venture is completed, the joint venture is
terminated.
Consignment: The continuity of business exists according to the willingness of both
consignor and consignee.
A joint venture occurs when two or more businesses join together to pursue
acommon project
Basics on joint ventures
CONSIGNMENT & JOINT VENTURES
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Many joint ventures seek to share the fixed costs of major business research /
infrastructure projects
Vodafone & Telefnica agreed in 2012 to share more of their mobile network
(with more than 18,500 mobile mast sites). This was a response to Everything
Renault-Nissan's joint venture with Indian firm Bajaj to produce a 1,276 car
Alliances in the airline industry e.g. Star Alliance and One World
Starbucks' expansion in India through a joint venture with the giant Tata
industrial group
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Govia, a joint venture between Go-Ahead Group and Keolis of France which
will operate the Thameslink rail franchise in London
Talk Talk agreeing in 2014 a joint venture with Sky to provide a fibre network
in York
Every one of the world's 24 biggest carmakers by sales now operates some
form of alliance or joint venture with another large carmaker.
Joint ventures
Two businesses agree to start a new project together, sharing capital, risks and profits.
Pros:
Cons:
Shared costs are good for tackling expensive projects. (e.g aircraft)
Pooled knowledge. (e.g foreign and local business)
Risks are shared.
Profits have to be shared.
Disagreements might occur.
The two partners might run the joint venture differently.
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Candidates should be able to distinguish between consignments and joint ventures and the
environment in which they operate. Candidates should be able to:
Prepare ledger accounts for joint ventures and calculate the profit for joint ventures.
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