CONSIGNMENT ACCOUNT: IN THE BOOK OF CONSIGNOR AND IN THE BOOK OF CONSIGNEE

 CONSIGNMENT ACCOUNT

Consignment is one of the terms used in transportation to mean the movement of goods from the owner who is called the consignor to his agent called the consignee who collects and sells the goods on his behalf.

The relationship between the owner (consignor) of the goods and the receiver (consignee) of the goods is like that of the principal and agent relationship. The ownership of the goods remains with the owner (consignor) until the goods are sold while the agent only has a possessive right.

Rewards of a Consignee

Unlike direct employees who receive wages or salaries for their services, a consignee is rewarded in the form of the following commissions:

1.     Normal commission

2.     Del-credere commission

3.     Overriding commission

1.     Normal omission: this is also known as Ordinary commission or Consignee remuneration. This commission is given is given on goods sold by the consignee. It is most times based on a fixed percentage of the sales made by the consignee.

2.     Del-Credere Commission: This commission is given when the consignee chooses to take responsibility for bad debts that may arise from credit sales. The del-credere commission is given to reward the consignee for giving protection to the consignor from bad debt. It is calculated as a percentage of credit sales or else there is other agreement between the two parties.

3.     Overriding Commission: This commission is given when the consignee meets a certain target set out by the consignor.     For example, an overriding commission may be given when the consignee meets a target sale or make sales at a higher price or work hard to promote a new product.

Preparation of a Consignment Account

The preparation of the consignment account is carried out by both consignor and the consignee and the preparation can be termed as follow:

1.     Consignment account in the book of the consignor

2.     Consignment account in the book of the consignee

1.     Consignment Account in the Book of Consignor

The account to be prepared by the consignor (owner of the goods) include the following:

A.   Consignment account

B.   Goods on consignment account

C.   Consignee account

A.   Consignment Account: This account is prepared by the consignor to determine the profit or loss on consignments. The account is debited with the cost of goods sent to the consignee, expenses made by both the consignor and the consignee on goods sent, and the commissions given to the consignee. The account is credited with the amount of goods sold, insurance claim if available, and the closing stock (closing inventory) at the time of preparing the account.

B.   Goods on Consignment: this account is prepared to determine the cost of goods sent to the consignee.

C.   Consignee Account: This account is prepared by the consignor to determine the amount due by the consignee. This account is prepared by the consignor to determine the amount to be deposited by the consignee on the goods sold. The account is debited with the value of sales made by the consignee and credited all expenses inured by the consignee on the goods and the commissions agreed upon by both parties.

D.   Cash Book: In addition to the three major accounts to be prepared by the consignor is the cash book to show the movement of cash within the period.

2.     Consignment Account in the Book of Consignee

The information about sales, expenditures, and commissions is summarized in an account called Account Sales by the consignee which is forwarded along with the amount due in the account to the consignor. Unlike the consignor, there are two major accounts prepared by the consignee which are:

           I.            Consignor account

        II.            Consignment receivable account

I.    Consignor Account: This account is prepared to show the amount of goods received from the consignor, the expenses incurred by the consignee, and the commissions received so as to determine the amount to be forwarded to the consignor as net pay on the goods received.

II. Consignment Receivable Account:  This represents the debtor's account of the consignee. It is prepared to determine the amount of goods sold on credit and the balance at the time of preparing the account.

VIDEO: QUESTION AND SOLUTION ON CONSIGNMENT ACCOUNT

ILLUSTRATION

On the 1st  of January, 2023, FADWORLD Enterprises, a sole distributor of SOFA Accounting textbook in Nigeria shipped 120 textbooks at N1,000 each to Abey Store of Acra, Ghana collect and sell the textbooks on its behalf.

On the 6th of January, 2023, FADWORLD enterprises paid for freight N10,000 and insurance N5,000 on the goods.

Abey, the consignee sent an account sales for the goods on 31st January 2023 which revealed that all the books have been sold. The information provided in the account is as follow:

a)     Sales: 25 textbooks at N1,700 each on credit.

          60 textbooks at N1,500 each in cash.

          35 textbooks at 1,200 each in cash.

b)    Abey store expenses on the goods are: distribution N5,000

    Warehouse N2,000

c)     Abey store is allowed a commission of 10% on sales and 5% on credit sales.

You are required to prepare the necessary accounts in the book of FADWORLD Enterprises for the month of January.

 

SOLUTION

From the above question, FADWORLD Enterprises is the owner of the goods (textbooks) being forwarded to its agent, Abey Store. Therefore, FADWORLD is the consignor while Abey is the consignee. Thus, the accounts to be prepared are based on how the accounts would appear in the book of the consignor.

Consignment Account
N	N
Goods on consignment     120,000	Abey (Sales)                    204,450
Bank (freight)                     10,000
Bank (insurance)                  5,000
Abey(Consignee) Expenses:
Distribution   5,000
Warehouse    2,000      7,000
Abey (consignee) Commission:
Normal comm.     20,450
Del-Credere coM. 2,125    22,575
Balance (transfer to P&L)  39,875	.
204,450	204,450

 

         

Goods on Consignment
N	N
	Consignment account      120,000

 

Abey Store (Consignee)  Account
N	N
Goods on consignment    120,000	Consignment a/c (Expenses):
Bank (freight)                   10,000	Distribution     5,000
Bank (insurance)                5,000	Warehouse       2,000   7,000
	Consignment A/c (Comm.):
	Normal comm. 20,450
	Del-Credere com. 2,125   22,575
.	Bank (Bal)                        174925
204,450	204,450

 

WORKINGS

WRK1: Goods on Consignment

        120 textbooks at N1,000 each

                  120 x N1,000

                  N120,000

WRK2: Sales (Abey Stores)

        25 textbooks at N1,700 each

                  25 x N1,700

                  N42,000

        60 textbooks at N1,500 each

                  60 x N1,500

                  N90,000

        35 textbooks at N1,200 each

                  35 x N1200

                  N42,000

        Sales (Total) = N42,500 + N90,000 + N42,000

                  = N224,500

WRK3: Commission:

        Normal commission = 10% of sales

                  10/100 x N204,500

                  = N20,450

        Del-Credere commission = 5% of Credit sales

                  5/100 x N42,500

                  = N2,125

        Total Commission = 20,450 + 2,125

                  = N22,575