Consignment is a type of arrangement where the goods are left in the possession of an authorized third party to sell. Generally, the consignor receives a percentage of the revenue from the sale which is at times a very large percentage, and that is in the form of commission.
Consignment is a shop which sells goods on behalf of an owner. The owner who keeps the ownership of his item until it sells, although if it sells. As the owner, one may pay even a small fee to the shop as compensation for selling the owner’s item.
Define Consignments
Consignment is actually a set arrangement where the goods are left in the possession of a third party who is authorized to sell the product. The consignor who receives a percentage of the revenue from the sale (sometimes at a very large percentage) is in the form of commission.
Consignment here deals with a variety of products, such as the artwork, clothing and accessories, also with the books. Even the retail stores may be considered as a special form of consignment where the producers rely on the retail stores to sell their products to the consumers, moreover, the second-hand stores and the thrift stores are associated with this arrangement of consignment.
Consignment, however, does not include the retailers such as the Walmart or the supermarkets, who purchases goods outright from the wholesalers and then mark their item up.
Understanding Consignment
In today’s era, the consignment shops have become trendy, especially those who offer a speciality in their products, like infant wear, pet care, or even the high-end fashion items. Today’s generation is known for their frugal shopping habits, which include buying from the high-end stores and designer boutiques, they are in favour of bargains which are found at the thrift and consignment shops.
Advantages of Consignment
Selling on consignment is a great option for every individual. To a certain extent, online companies like eBay are the consignment shops as for a percentage of the sale, they offer people a marketplace to exhibit and then sell their wares and items. This removes the requirement for an individual to create their own website, attract other customers, and also set up payment processes. Likewise, the items to be marketed and sold through television channels are also forms of consignment.
Sellers lack the time or their desire to advertise their product for sale, or to take time off work to accommodate the prospective buyers' schedules, to conduct the pricing research, and then to endure the tasks associated with the selling an item often find the consignment fees is a smaller pay to put the work in someone else's hands, particularly if they are successful in negotiating to a low fee.
Examples of Consignment
A film artist has five large pieces of artwork to sell but does not have a place to showcase their work for prospective buyers. The artist then decides to employ a theatre to show and sell his works of art. The theatre does not charge the artist a fee for space but will charge a sales commission for any art or work sold, which is incorporated into the price paid.
Another example of the consignment would be Bini visiting her grandmother's house and finding an old case full of clothes. She keeps a few pieces that she likes and decides to sell the rest of them. She takes the clothes to a second-hand store to sell the clothes on consignment. Bini and the store come to an agreement that Bini will receive 60% of the revenues from the items that are sold while the store will receive the remaining 40% of the profit.
FAQs on Consignments: Features and Accounting
1. What is consignment in accounting and who are the parties involved?
Consignment is a business arrangement where one person, the owner of the goods, sends them to another person to be sold on their behalf. The two main parties involved are:
Consignor: The owner of the goods who sends them to an agent for sale. The consignor retains ownership and bears the risk associated with the goods until they are sold.
Consignee: The agent who receives the goods from the consignor, holds them in possession, and sells them to the final customer for a commission.
2. What are the key features that distinguish consignment from a regular sale?
While both involve the transfer of goods, consignment and sale are fundamentally different. The key distinctions are:
Ownership: In a consignment, the consignor retains ownership until the goods are sold by the consignee. In a sale, ownership transfers immediately from the seller to the buyer.
Risk: All risks of loss or damage to the goods remain with the consignor. In a sale, the risk passes to the buyer along with ownership.
Relationship: The relationship between the parties is that of a principal and an agent (consignor and consignee). In a sale, it is a debtor-creditor relationship.
Return of Goods: The consignee can return any unsold goods to the consignor without any liability. A buyer generally cannot return goods unless they are defective. For a detailed comparison, you can explore the distinction between consignment and sale.
3. How is the profit or loss on a consignment calculated?
To calculate the profit or loss on a consignment, a special account called the 'Consignment Account' is prepared in the books of the consignor. The calculation involves:
Debiting all expenses: This includes the cost of goods sent on consignment, expenses incurred by the consignor (like freight, insurance), and expenses incurred by the consignee on the consignor’s behalf (like storage, selling expenses).
Crediting all incomes: This includes the gross sale proceeds received from the consignee and the value of any unsold closing stock.
The final balancing figure in the Consignment Account reveals the profit (if the credit side is greater) or loss (if the debit side is greater), which is then transferred to the general Profit & Loss Account.
4. What are the most important journal entries passed in the books of the consignor?
The main journal entries in the consignor's books for tracking a consignment are:
For sending goods to the consignee:
Consignment A/c Dr.
To Goods Sent on Consignment A/cFor expenses incurred by the consignor:
Consignment A/c Dr.
To Cash/Bank A/cFor recording the Account Sales (sales made by consignee):
Consignee’s Personal A/c Dr.
To Consignment A/cFor recording consignee's expenses and commission:
Consignment A/c Dr.
To Consignee’s Personal A/cFor profit on consignment:
Consignment A/c Dr.
To Profit & Loss A/c
5. Why is the valuation of closing stock in consignment so important, and how is it calculated?
The valuation of closing stock in consignment is crucial because it directly impacts the calculation of profit for the accounting period. An incorrect valuation leads to an incorrect profit or loss figure. The principle is to value the stock at cost price plus a proportionate share of non-recurring expenses. The formula is:
Value of Closing Stock = (Cost of Unsold Goods) + (Proportionate Non-Recurring Expenses incurred by Consignor) + (Proportionate Non-Recurring Expenses incurred by Consignee).
Non-recurring expenses are those incurred to bring the goods to the consignee's godown, such as freight, insurance-in-transit, and customs duty. Recurring expenses like godown rent or sales commission are not included in the valuation.
6. Who bears the risk of loss or damage to goods in a consignment arrangement and why?
The consignor bears all the risk of loss or damage to the goods until they are sold to a final customer. This is because the consignor remains the legal owner of the goods throughout the arrangement. The consignee only has physical possession as an agent. Therefore, any loss, whether it is a normal or abnormal loss, is ultimately the consignor's responsibility. The consignee is only liable if the loss occurs due to their negligence.
7. What is the difference between an ordinary commission and a del-credere commission?
The commission is the consignee's remuneration for selling goods. The main types are:
Ordinary Commission: This is a standard commission paid to the consignee, calculated as a fixed percentage of the total gross sales proceeds. The consignee has no responsibility for bad debts if they sell goods on credit as per the consignor's instructions.
Del-credere Commission: This is an additional commission paid over and above the ordinary commission. In return for this extra commission, the consignee takes on the risk of bad debts. If any customer fails to pay for goods sold on credit, the loss is borne by the consignee, not the consignor.
8. What is a Proforma Invoice and how does it differ from a regular Sales Invoice?
A Proforma Invoice is a document sent by the consignor to the consignee along with the goods. It looks like a regular invoice but is for informational purposes only. It specifies details like the quantity, quality, and price of the goods, but it does not create a debt or demand payment. In contrast, a Sales Invoice is a legal document issued by a seller to a buyer confirming that a sale has occurred. It serves as evidence of the buyer's obligation to pay the seller, thereby creating a debtor-creditor relationship.
