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Accounting System Design for Consignments

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Designing the Accounting System

Recollect that designing an accounting system for an organisation starts with deciding on the account heads to be maintained for the purpose of deriving the information that we need from the system. We should also be conscious of the fact that "The basic purpose of accounting is derivation of information" and "The more information we need the more accounting heads we have to maintain".

Who maintains the accounts : Consignor/Consignee

The Consignor (M/s Innova Steels) and the Consignee (M/s Maruthi Traders) are two different business entities.
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Each of them have their own accounting system in place and in use for the ascertainment of the profits of their respective businesses. Here the business that is now intended to be carried on is something that is being done by both the parties in addition to their already existing business.

Both the parties need to account for the transactions relating to this activity for the purpose of ascertaining what benefit they are getting out of it and also for the purpose of deriving any other related information. Therefore we need to learn what account heads are used in each books and how the transactions are recorded in each books. The position of both the parties with regard to the transactions is not the same. The Consignor takes his decisions based on the profit that is being made and the consignee takes his decisions based on the commission he earns.

The consignee's income from the business is just commission and he has very little risk in the business, whereas the consignor bears all the expenses of the business and is the person who takes the complete risk of the business. He therefore retains all the profits of the business. Therefore the effect of a transaction on both the consignor as well as the consignee may not be the same.

Therefore we have to learn the impact of a transaction in the books of the consignor and the consignee separately.

Some account heads already exist/are in use.

We should be conscious of the fact that M/s Innova Steel and M/s Maruthi Traders are already having an accounting system and we are trying to adjust the system to record the transactions relating to consignments also. Account heads like "Cash a/c", "Bank a/c", "Purchases a/c", "Trading a/c", "Bad Debts a/c", "Debtor a/c" etc., to name a few. Therefore when we use "Cash a/c" while recording the transactions relating to Consignments, we should be aware that we are using the already existing "Cash a/c" and not a new account created for the purpose of Consignments.

New Account Heads

The variations to be brought into the system would be by including new accounting heads in the list of already existing accounting heads. The account heads to be included vary depending on whether we are considering the books of M/s Innova Steels (Consignor) or M/s Maruthi Traders (Consignee). These accounting heads would provide information relevant to and accruing on account of the additional transactions that occur because the organisation is taking up the additional consignment business. Only a few additional account heads are created for this purpose. We learn about them only.

The account heads that are to be newly created

  • In the books of the consignor are:

    1. Consignment a/c – Nominal Account
    2. Consignee a/c – Personal Account
    3. Goods Sent on Consignment a/c – Nominal Account
    4. Stock on Consignment a/c – Real Account
    5. Consignment Debtors a/c – Personal Account
    6. Stock Reserve a/c – Special Nominal Account
  • In the books of the Consignee are:

    1. Consignor a/c – Personal Account
    2. Ordinary Commission a/c – Nominal Account
    3. Del Credere Commission a/c – Nominal Account
    4. Overriding Commission a/c – Nominal Account
    5. Special Commission a/c – Nominal Account
    6. Consignment Debtors a/c – Personal Account
    7. Consignment Expenses a/c – Nominal Account
    8. Consignment Bad Debts a/c – Nominal Account
    9. Consignment Income a/c – Nominal Account

The above account heads would be needed where they wish to maintain their accounting in as much detail as possible.

Minimum Account Heads

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Where they wish to maintain their accounting with minimum detail the following account heads are to be created
  • In the books of the consignor are:

    1. Consignment a/c – Nominal Account
    2. Consignee a/c – Personal Account
    3. Goods Sent on Consignment a/c – Nominal Account
    4. Stock on Consignment a/c – Real Account
    5. Stock Reserve a/c – Special Nominal Account
  • In the books of the Consignee are:

    1. Consignor a/c – Personal Account
    2. Commission a/c – Nominal Account
    3. Consignment Debtors a/c – Personal Account
    4. Consignment Expenses a/c – Nominal Account

Note:

We will explain both the books of the consignor as well as the consignee. A transaction may have its effect in the books of either the consignor or the consignee or both. The effect of a transaction in both the books is given in the same page.

If you think you are getting confused, you can use the link to "Hide/Show" the books of consignee while learning the impact in the books of the consignor and vice versa.

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