Concepts and Terms used in Consignments

1. Two parties: Consignment accounting mainly involves two party's consignor and consignee.
2. Transfer of possession: Possession of goods transferred from consignor to consignee.
3. Agreement: There is a pre-agreement between the consignor and consignee for terms and conditions of the consignment.
4. No transfer of ownership: The ownership of goods remains in the hands of the consignor until the consignee sells it. The only possession of goods is transferred to a consignee.
5. Reconciliation: At the end of the year or periodic intervals consignor sends Proforma invoice while consignee sends account sale details and both reconcile their accounts
6. Separate accounting: There is independent accounting done of consignment account in the books of consignor and consignee. Both prepare consignment account and record the journal entries of goods through consignment account only

An account sale is a statement of affairs, relating to the consignment, prepared periodically by the consignee, and sent to the consignor.

The details in the account sales form a basis for the consignor, to account for the transactions that take place at the consignee's end.

We can divide an account sale into three sections on the basis of information it provides to the consignor.

1. The header section: comprises of the business name of consignee, the business name of consignor, the date at which the account sales is prepared and some particulars that can be helpful to recognize the consignment for which the account sales is prepared.
2. The middle section: shows the actual transactions i.e., the details of the gross sales proceeds realized, consignee's regular and del credere commission, expenses paid on consignee, any advance sent by consignee to consignor and the net balance for which the consignee is liable to pay.
3. The bottom section: talks about the mode of payment being used by the consignee to clear the balance and also contains the signatures of the consignee

A consignor may have some incomplete consignments at the end of his accounting year. An incomplete consignment means that there are some unsold units of goods with the consignee when the accounting period of the consignor comes to an end. These unsold units are termed as closing stock on consignment (or just stock on consignment for short) and need to be properly valued. After valuation, the stock on consignment must be brought into the books and credited to the consignment account so that the profit earned on consignment during the period can be computed correctly. The journal entry for this purpose is given below:

DR: Stock on consignment account CR: Consignment account

The stock on consignment is an asset and is, therefore, shown on the year-end balance sheet. In the next accounting period when consignment account is prepared, this stock appears as the first item on the debit side of this account. The following journal entry is made for this purpose:

DR: Consignment Account CR: Stock on consignment Account

1. Consignor: It is the person that sends goods. Consignee: The person who receives the goods is called the consignee.
2. Consignment: Consignment is a business arrangement through which the consignor sends goods to the consignee for sale.
3. Consignment agreement: It is a legally written communication between the consignor and consignee, which defines the terms and conditions of the consignment.
4. Pro-Forma Invoice: When the consignor sends goods to the consignee, he also forwards statements showing details of goods such as quantity, price, etc. and that statement is called the Pro-forma invoice.
5. Non-recurring expenses: Expenses that are incurred by the consignor to dispatch the goods from his place to the place of the consignee are called non-recurring expenses. These expenses are added to the cost of goods.
6. Recurring expenses: The consignee incurs these expenses after the goods reached his place. These expenses are maintenance of goods type expenses.
7. Commission: Commission is the reward/ consideration for the sale of goods on behalf of the consignor. It is as per the consignment agreement.