CHAPTER THREE

Accounting For:

Consignment, and Installment

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 3.1 Consignment Sales
Consignment: is a transfer of
possession of merchandise from the
owner to another person who acts as
the sales agent of the owner.

Ownership remains with the owner

(consignor); the sales agent who has
possession of the merchandise is called a
consignee.
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 Consignment

Goods Consignee
Consignor
(Owner of the goods) (Agent)
Net proceeds
+
Account sales

•Consignment-out account
•Consignment-In account

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 Nature of a consignment
If the owner of the goods does not have
retail outlets (Or can’t sell it outright), it can
consign the goods to an agent.

The agent will sell the goods for him and

receive a commission in return.

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1. Consignor
• The owner of the goods who sends the
goods to an agent for sale.
2. Consignee
• Who sells the goods for the consignor.
• Sells the goods and collects the money
from the customers.
• Will pay the consignor the net proceeds
(Proceeds – Expenses – Commission) &
provide the consignor an account sales
showing all the proceeds and expenses.

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3. Consigned Goods
• Goods sent on consignment are the
property of the consignor until the
goods are sold.
• The consignor should include all the
unsold goods on consignment in its
closing stock.

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There is principal and agent r/nship, and
the law of agency controls the
determination of the obligations and
rights of the two parties.
Consignees are responsible to consignors for
merchandise placed in their custody until it
is sold or returned.
Consignees neither include it in inventories
nor record trade A/P or other liability.
The only obligation of consignees is to give
reasonable care to the consigned merchandise and to
account for it to consignors.

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When mdse is sold by the consignee,
resulting A/R is the property of the
consignor.

The shipment of merchandise on

consignment may be referred to by the
consignor as a consignment out, & by
the consignee as a consignment in.

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 Consignment Vs Regular Sales

When merchandise is shipped on

consignment:
Title does not pass and the consignor
retains ownership title
No revenue is recognized by the
consignor at the time of shipment
The consignor owns any unsold
consigned merchandise

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Accounting for Consignor & Consignee

Receipt of shipment
Consignee may record receipt of
shipments in any of several ways:
The objective is to create a memo record of the
consigned merchandise

The receipt could thus be recorded:

By a memo notation in the General journal
By an entry in a separate ledger of consignment
shipments
By a memorandum entry in a general ledger
a/c entitled Consignment In- xyz.

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 Illustration
Assume that Salem PLC, an importer and whole
seller, ships 10 TV sets to NAM PLC (with
consignment), a retailer in Hawasa to be sold at
Br.3,500 each.

Freight costs of Br.500 are to be reimbursed to

Nam.
Nam also receives a commission of 10% of the
selling price.

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 Transactions : Consignee
1. Received consignment shipment of 10 TV
sets to be sold @ Br. 3,500. Consignee has
a policy of maintaining memo entry in
General ledger
2. Paid Freight costs on behalf of consignor
3. Sold all of the consigned TVs at agreed
price of Br.3,500
4. Deducted 10% Commission on
Consignment sales
5. Transferred the Net proceed of Br.31,000
Illustration: RECORDS BY NAM Plc (The Consignee)
1. Consignment In- Salem PLC

Date Explanation Dr. Cr. Bal.

Received 10 TV sets to be sold for

3,500 each at a commission of 10% of
selling price

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 The journal entries to record the payment of freight costs and sales of
the merchandise by the consignee:

2. Consignment In- Salem PLC 500

Cash 500
[payment of freight costs on shipment from consignor]

3. Cash 35,000
Consignment In- Salem PLC 35,000
[sales of 10 TV sets at 3,500 each]

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4. Consignment In- Salem PLC 3,500
Commission Revenue- Consignment Sales 3,500
To record 10% commission earned on TV sets sold

5. Consignment In- Salem PLC 31,000

Cash 31,000
To record payment in full to consignor

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 NAM Plc
Hawasa
Account Sales
Hamle 30, 2008
Sales for account and risk of: Salem PLC
Addis Ababa

  Sales: 10 TV sets @ Br. 3,500 35,000

Charges:
Freight cost 500
Commission (35,000*10%) 3,500 4,000
Balance (remittance to consignor) 31,000
Consigned TV sets on hand none

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 Accounting for Consignor

The choice of accounting method by a

consignor depends on whether:
1. Consignment Gross Profit are measured
separately from those on regular
sales? OR
2. Sales on consignment are combined with
regular sales?
EXAMPLE:
Assume that the cost of TV sets shipped to Hawassa
is 2,500 each.
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 Transactions - Consignor
1. Shipment of 10 TV sets on consignment to Nam PLC. Unit
cost of TV set is Br.2,500 each.
2. Slaem Paid an additional packaging cost of Br. 300 on
those consiged TVs.
3. Received Account sales from NAM PLC as follows:
Sales 35,000
Less: Freight charge (500)
Commission charge (3,500)
Net Proceed Transferred 31,000

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Upon shipment
1) The entry to be made under both alternatives would be:
Consignment Out-Nam 25,000
Inventories 25,000

2) Packing expenses of Br. 300 allocated to consigned merchandise

Alternative I)
Consignment Out-Nam 300
Packing Expense 300

Alternative II)
1) SAME
2) No entry required.
3) Consignment sales of Br.35,000 reported by consignee (NAM)
Alternative I)
a)
Cash 31,000
Consignment Out- Nam 500
Commission Expense- Cons Sales 3,500
Consignment Sales 35,000
b)
Cost of Const. sales 25,800
Consignment Out- Nam 25,800
Partial I/St.
Consignment sales 35,000
Less: Cost of Cons Sales 25,800
Commission 3,500 29,300
Gross profit on consignment sales 5,700

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 Alternative II)
Cash 31,000
Freight Out (Sales) Expense 500
Commission Expense 3,500
Sales 35,000

Cost of Goods Sold 25,000

Consignment Out- Nam 25,000

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 Accounting for Partial Sale of Consigned Merchandise
Assume that 4 of the 10 TV sets on consignment are sold at
the end of the accounting period. Package cost=Br.300
 Consignment sales of Br.14,000 & payment of Br.5,000 received.
 Charges by consignee: freight costs of 500 and comm. of 1,400
Alternative I)
Cash 5,000
Trade Accounts Receivable 7,100
Consignment Out- Nam 500
Commission Expense- Cons Sales 1,400
Consignment Sales 14,000
 
Cost of Consignment Sales 10,320
Consignment Out- Nam 10,320
2500+30+50=2580*4

Inventories on consignment (C-out) = 15,480

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 Alternative ii)
Cash 5,000
Trade Accounts Receivable 7,100
Freight Out Expense 500
Commission Expense 1,400
Cons. Sales 14,000

Cost of Goods Sold 10,000

Consignment Out- Nam 10,000
(4*2500)

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 Other Issues
 Return of Unsold Merchandise by Consignee
 return shipment and repair costs should also be recognized as expense by
consignor

 Advances from Consignees

 As Liability

 Bad Debts
 Normally, accounted by Consignor
 If (del credere agent) special commission based: Borne by Consignee

 Use of Subsidiary Ledger accounts

Inventories, G-I-T
Consignment-In: x,y,z Consignment-out:A,B,C
Commission Revenue-Consignment Sales-Consignment
Cost of consignment sales

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 Valuation of stock
 If there are unsold goods on consignment at
the end of the accounting period, the value of
the unsold stock will be carried down to the
following period.

Valuation of stock=Consignor’s Cost +Consignee’s Expenses

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 Consignment-in Account
$ $
Bank – consignee’s expenses x Bank – sales x
Commission Received x Debtors – sales x
- ordinary x
- del credere x
Debtors – disc. allowed x
Debtors – bad debts x
Bank / Bill payable – to consignor x _
x x

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