The document discusses accounting procedures for consignment transactions between a consignor and consignee. It defines key terms like consignment, consignor, consignee. It explains how the consignor records the sending of goods to the consignee by debiting a Consignment account and crediting Goods Sent on Consignment account. The consignee does not make entries. It also provides examples of journal entries made by both parties to record expenses, sales, commission, and unsold inventory. Finally, it shows an example problem outlining a full consignment transaction between two parties.

1. THE SYSTEM OF ACCOUNTING
VOLUME III
WRITTEN BY:
SYED AQEEL RAZA
MASTER OF COMMERCE & POLITICS

2. CONSIGNMENT
The consign is a verb which means to send and the consignment of its
noun which means sending goods to another person or agent for the
purpose of sale or introducing goods in another city, place or country.
Then we can say that the consignment is an agreement between the
owner and agent wherein the goods or materials are given over to
another person’s charge, custody or care on the risk of the sender but
the owner retains the legal ownership or title until the goods or
materials are sold.
The agent sells the goods on behalf of the sender according to his
instructions. The agent is authorized to incur all expenses to receipts,
storage, and sale of goods or materials.
The following terminologies are used in consignment accounting;
CONSIGNMENT:
The consignment is an agreement of sending goods on commission
basis under sender’s risk and expenses. The sender is the owner of
goods and retains the legal ownership of the materials which he sends
to commission agent.

3. In consignment, the consign searches a suitable party in another city or
country and settles the terms and conditions of sale. Suppose that Mr.
A is the manufacturer of watches and making them in Karachi if wants
to increase his sale or popularity of his product, he will go another city
suppose that Lahore and where he will find the dealer or shops they are
involved in selling watches. Mr. ‘A’ found Mr. D who are doing this
business and will say him that he is making watches in his city and
wants to keep them in his shop under his risk and expenses and will pay
commission over the sale. The mutual agreement with A and D will
make the agreement which will be called consignment.
CONSIGNING:
The act of sending goods by the owner of the goods to his agent in
another city or place for the purpose of increasing sale under
commission is consigning. The owner bears all expenses and losses of
the goods.
CONSIGNOR:
The word consigner is used in place of the seller in consignment
agreement. The consigner is the principal party who sends the goods on
consignment.
CONSIGNEE: The consignee is another name of the buyer or the party
to whom the goods are sent for sale on commission by the consignor.

4. COMMISSION:
The agreement of consignment refers to the commission to the
consignee on which he was agreed to keep the goods of consignor on
his shop and generally it is worked out on the agreed percentage of the
gross proceed of sales.
THE PROCEDURE OF CONSIGNMENT
The procedure of consignment discusses on;
DISPATCHES
The consignor dispatches or ships the agreed quantity of goods or
materials at his own risk and expenses his agent called consignee under
invoice which is called pro-forma invoice.
PRO-FORMA INVOICE:
The pro-forma invoice is an estimated invoice which is sent by the
consignor in advance of a shipment or delivery of goods. The pro-forma
invoice describes the kind and quantity of goods, their value, and other
important information like weight and transportation charges. The pro-
forma invoice differs from a normal invoice and which does not
demand or request for payment.

5. DEL CREDERE COMMISSION
The consignor expects the sale of goods from consignee at as high a
price as he can procure and for this service he pays to consignee the
commission at an agreed percentage of the gross sale. If the consignee
undertakes to bear losses and bad debts in respect of credit sales, the
consignee is paid an extra remuneration known as DEL CREDERE
commission.
DEL CREDERE AGENT
The DEL CREDERE Agent is a sale agent to whom the goods are given
under the agreement of consignment and who undertakes the
guarantee of his customers and gives them the consigned goods on
credit and in case of any loss or bad debt, he compensates to the
consignor and for this work he charges extra remuneration or
commission higher than normal rates.
AUTHORIZATION;
The consignee is authorized to do all necessary expenses against
receipts, storage, and sale of consigned goods which are usually met
out of sale proceeds.
ACCOUNT SALES
It is a statement which is prepared and sent by the consignee to the
consignor periodically showing him to the goods sold, sale proceeds,
the expense incurred, commission payable and the net amount due to
the consignor. This statement is called Accounts Sales as in the
following form;

6. ACCOUNTS SALE
Sale (Unit sold x Sale price) xxxxx
Less: Expenses:
Freight xxxx
Insurance xxxx
Storage and custody xxxx
Advertising xxxx
Brokerage xxxx
Commission xxxx xxxx
------------- --------
Less: Advance already sent xxxx
Bank Draft enclosed for the balance =====
On receipt of Account Sale from the consignee, the consignor records
the detail of sale and expense incurred by the consignee as well as the
commission payable to the consignee, the sale proceeds against
consignment and the amount received from the consignee.

7. ACCOUNTING FOR CONSIGNMENT:
The Consignor makes three accounts in respect of each consignment
which are;
1- Consignment account
2- Goods sent on consignment account
3- Consignee’s personal account
In case of having more than one consignee or agent, the consignor has
to prepare separate account for each consignee or agent each
consignment account is identified with the place, name or name and
place of the consignee as;
Consignment to Lahore A/c or
Consignment to Mr. XYZ A/c or
Consignment to Mr. XYZ, Islamabad A/c
CONSIGNMENT ACCOUNT
This account is made to show profit and loss on each consignment, in
other words, it is a sort of profit and loss account wherein the credit
side shows sale and debit side; the cost of goods consigned, all
expenses, commission payable to consignee and profit or loss on the
consignment.

8. GOODS SENT ON CONSIGNMENT ACCOUNT
It is an inventory account and its balance is transferred to profit and loss trading
account.
CONSIGNEE’S PERSONAL ACCOUNT
When goods are sent to the consignee, there is no entry is made on this account.
The expenses on sending goods to consignee are not recorded in consignee’s
personalaccount.
ASSESSMENTOF CONSIGNMENT:
The consignment sale is the other name of transferring stock from one place to
another place and when the sale is confirmed the stock is assessed as;
VALUATIONOF UNSOLD STOCK
Consignment stock must be priced at cost price plus a relevant portion of the
expenses or direct expenses incurred by the consignor and the consignee as;
Value of closingstock= Total costof goodssenton consignment
+ Direct expensesincurredonthem X unsoldunits
Unitsreceivedbyconsignee
LOSSES IN CONSIGNMENT
In case of lossinconsignment,there maybe differentreasonssuchas;
NORMAL LOSS
The normal loss may be due to natural causes such as evaporation, dry age, breaker age in bulk etc. and
thenthe cost of the productthat is lostshouldbe adjustedbyclosingstockasunder:
Value of closingstock= Total costof goodssenton consignment
+ Direct expensesincurredonthem x unsoldunits
Unitsreceivedbyconsignee–unitslost

9. ABNORMALLOSS
Sometimes abnormal losses come in consignment as to loss of goods-in-transit, thefts, damaged or
destroyedgoodsbyfire andthese maybe recordedinthe bookof consignoras;
Abnormal Lossaccount debit
Consignmentaccount credit
(To recordabnormal loss)
Insurance Company/Bank debit
P & L A/c(balancingfigure) debit
Abnormal LossA/c credit
(Losspartlyrecoveredbythe Insurance Companyandthe balance transferredtoP&L Account.
Suppose that Aleem and KALEEM agreed on consignment deal and result of this
deal Mr. Aleem who is consignor sends goods worth Rs.200, 000 to KALEEM who
is consignee. Aleem is doing business in Karachiand KALEEM in Islamabad.
ALEEM’S BOOK (CONSIGNOR) - JOURNAL ENTRY
Consignment /KALEEM A/c (Dr.) 200,000/=
Goods sent on consignment A/c (Cr) 200,000/=
(To record goods sent to consignee/KALEEM)
- The consignment to KALEEM account shows that the inventory is in the
custody of consignee, KALEEM.
- Goods sent on consignment account describes that the inventory of
consignor, Mr. Aleem moves to the consignee, KALEEM account. This
account is opened in place of inventory or stock or purchase account which
do contra inventory account in profit and loss trading account.
The transfer of stock from one account to another account describes the
ownership of consignor.

10. KALEEM’S BOOK (CONSIGNEE) - JOURNAL ENTRY
- No entry –
When goods sent on consignment to consignee describes that the inventory has
moved only under consignee’s custody who is not the owner of the goods for
which he will be paid commission, salary, extra commission as well as all the
expenses to be incurred during the period of inventory kept under consignee’s
custody.
Aleem incurred expenses of Rs.2000/= on sending the goods as freight and
insurance.
ALEEM’S BOOK (CONSIGNOR) - JOURNAL ENTRY
ConsignmentKaleem A/c (Dr.) 2000/=
Bank (Cr.) 2000/=
(Freightand insuranceincurred by consignor)
The expenses which are concerned with the consignor, not to consignee will be
recorded in the book of a consignor under consignment account. This expense is
paid directly by the consignor at the time of shipping goods to the consignee and
these expenses are not concerned with consignee’s account.
KALEEM’S BOOK (CONSIGNEE) - JOURNAL ENTRY
- No entry -

11. The reason for no entry in the book of consignee is that the expenses of
freight and insurance which are paid by consignor, not consignee. The
consignee is not concerned with this type of expense in account
summary because it is not paid by him.
KALEEM sent Account Sale Statement which he had recorded in his
book as;
KALEEM at Islamabad
Account Sales
(In the book of consignee)
Sale 250,000.-
Less: Expenses
Salary (1 month salary x 5,000) 5,000.-
Expenses 10,000.-
Commission (250,000 x 5%) 12,500.-
----------
27,500.-
-----------
222,500.-
Less: Draft enclosed 122,500.-
------------
Balance due 100,000.-
========

12. Mr. KALEEM is allowed by Mr. Aleem a salary of Rs.5000/= per month till the
stock is sold.
ALEEM’S BOOK (CONSIGNOR) - JOURNAL ENTRY
Consignment Kaleem A/c (Dr.) 5000/=
KALEEM A/c (Cr.) 5000/=
(To record salaryof consignee)
The consignee Mr. KALEEM is also given salary for introducing or selling the
consignor’s goods. The salary to consignee is the technique to force the
consignee to give an output of the consigned goods and because of salary;
the consignee will be more responsible and will consider the employee of
the consignor.
KALEEM’S BOOK (CONSIGNEE) - JOURNAL ENTRY
Aleem A/c (Dr.) 5000/=
Salary A/c (Cr.) 5000/=
(To record salaryfrom consignor)
The consignee records consignor’s account debit means the salary is
receivable from consignor which will be treated as expense in account sale
statement which the consignee will send to the consignor and records salary
as credit means the consignee will record salary from consignor in his books
of accounts as salary account credit means salary is an extra income of the
consignee which is given by the consignor.

13. Expenses incurred by KALEEM during the sale of consignment stock
were Rs.10, 000/=.
ALEEM’S BOOK (CONSIGNOR) - JOURNAL ENTRY
Consignment Kaleem A/c (Dr.) 10,000
KALEEM Account 10,000
(To record expenses incurred by consignee)
KALEEM’S BOOK (CONSIGNEE) - JOURNAL ENTRY
Aleem A/c dr. 10,000/=
Cash/Bank a/c cr. 10,000/=
All the goods were sold in 1 month at Rs.250, 000/= on which Aleem
allowed 5% commission to the consignee KALEEM.
ALEEM’S BOOK (CONSIGNOR) - JOURNAL ENTRY
Consignment A/c dr. 12,500/=
Kaleem A/c cr. 12,500/=
(To record commission of consignee)

14. KALEEM’S BOOK (CONSIGNEE) - JOURNAL ENTRY
Aleem A/c dr. 12,500/=
Commission A/c cr. 12,500/=
(To record commission on sale by consignor)
In the account sale, KALEEM shows a sale of Rs.250, 000/=.
ALEEM’S BOOK (CONSIGNOR) - JOURNAL ENTRY
Kaleem A/c Dr. 250,000/=
ConsignmentKaleem A/c cr. 250,000/=
(To record sale made by consignee)
KALEEM’S BOOK (CONSIGNEE) - JOURNAL ENTRY
Bank A/c dr. 250,000/=
Aleem A/c cr. 250,000/=
(To record sale made by consignee)
In order to consignment sale, the profitcame as Rs.20, 500/=
ALEEM’S BOOK (CONSIGNOR) - JOURNAL ENTRY
ConsignmentA/c 20,500/=
P & L A/c 20,500/=
(To record the profiton consignment)

15. Consignment /Kaleem A/c
(In the book of consignor/Aleem)
Goodssenton consignment 200,000 KaleemA/c 250,000
Bank A/c- expenses 2,000
KaleemA/c- salary 5,000
KaleemA/c- expenses 10,000
KaleemA/c- commission 12,500
P & L A/c(balancingfigure) 20,500
250,000 250,000
Suppose further that;
1) Muneer dispatched to Bashir 500 shirts costing of 200/each.
2) Muneer pays Rs.5000/= for insurance in transit, 2000/= on
packing and 2000/= for cartage from consignor to consignee.
3) On the receipt of goods, Bashir had to paid Rs.5000/= on freight,
Rs.1000/= on octroi and Rs.1, 000 on cartage.
4) Bashir sales 400 shirts at Rs.350/= each.
5) Bashir was allowed two-month salary @ Rs.3000/month.
6) The consignor allowed 5% commission on the sale.
7) 100 pieces of shirts remained unsold on 31.12.2016 at the closing
of the accounting year.
8) Bashir sends Account sale to Muneer with the draft.
9) If 50 pieces of shirts had destroyed during transit and 50 shirts
remained unsold on 31.12.2016
10) The consignee returned unsold stock to the consignor.
11) Bashir sent a draft of Rs.100, 000/= to Muneer. The balance
amount will be paid later.

16. 1- ACCOUNT SALES
BASHIR (CONSIGNEE)
Account Sales
(In the book of consignee)
Sale (400 shirts @ Rs.350/= each) 140,000.-
Less: Expenses
Freight charges 5,000.-
Octroi 1,000.-
Cartage 1,000
Commission (140,000 x 5%) 7,000.-
Salary (3000 x2 months) 6,000.-
-20,000.-
-----------
120,000.-
Less: Draft enclosed 120,000.-
------------
Balance due -
------------

17. 2- VALUE OF STOCK:
Value of closingstock= Total costof goodssenton consignment
+ Direct expensesincurredonthem X unsoldunits
Unitsreceivedbyconsignee
Cost of goods on consignment (500 shirts x 200/=) = Rs.100,000/=
EXPENSES INCURRED BY COSIGNOR:
Insurance in-transit 5,000
Packing Charges 2,000
Cartage 2,000 Rs. 9,000/=
EXPENSES INCURRED BY COSIGNEE:
Freight 5,000
Octroi 1,000
Cartage 1,000 Rs. 7,000/=
Total cost of goods consigned (500 units) Rs.116,000/=
Total costof goods = Rs.116,000/=
Per unit cost (116,000/500) Rs.232/=per unit
Value of unsold stock (100 units) = unsold units x total costper unit
= 100 units x Rs.232
= Rs.23,200/=

18. 3- CALCULATION OF CLOSING STOCK
Cost of unsold units (Rs.232/per unit x 50 units unsold) Rs.11,600/=
Add: Expenses incurred by the consignor =
(5,000 + 2,000 + 2,000 /500) X 50 Rs. 900/=
Add: Expenses incurred by the consignee =
(5,000 + 1,000 + 1,000 /500) x50 = Rs. 700/=
Cost of closing stock (50 shirts) Rs.13,200/=
4- VALUE OF ABNORMAL LOSS
Cost of 50 destroyed shirts Rs.10,000/=
Expenses incurred by consignor
(5,000 + 2,000 + 2,000 /500) X 50 Rs. 900/=
Cost of abnormal loss on 50 shirts Rs.10,900/=
The consignment sale is the technique of sale.