In a consignment business, the risk and return belong to the consignor completely. The consignee is just an agent selling on behalf of the consignor.

He would sell goods, deduct his commission on sales from the sale proceeds, and then deduct the reimbursement he is entitled to for the expenses he might have incurred on consignment and remit the rest to the consignor.

His sending an advance amounts to paying before selling and effectively investing for the consignors business.

Justification for an advance

The consignee is also a beneficiary of the consignment business in the form of the commission he earns for sales on consignment. He would be willing to pay some advance and thereby invest for the business if he is confident of selling the goods being sent by the consignor.

Where the product being consigned is a fast-moving product, the consignor would look for getting an advance from the consignee, to fund his business operations.

But for the fact that the amount is being sent before making the sale, there would be no difference between the consignee transferring funds as an advance and as a payment for dues subsequently. These explanations are relevant in all cases of fund transfer by the consignee.

The Consignee would transfer funds to the consignor, in one or more of the following ways.

• Cash

  Consignee sends cash to the consignor.

• Cheque

  Consignee sends a cheque or any other banking instrument to the consignor which is collected through a bank by him.

• Transfer of an asset by the consignee to the consignor

  The amount paid by the consignee to the consignor may be by transfer of an asset owned by him. Endorsing a Bills Receivable is an example.

  • Consignee endorsing a Bill

    Bills Receivable in the books of accounts is an asset. It may be utilised like any other asset in clearing dues if the other party is willing to take it.

    The consignee would endorse a bill receivable in his books to the consignor, making him the endorser and the consignor the endorsee, of the bill.

    This results in

    • an increase in the value of an asset by name Bills Receivable (B/R) in the books of the consignor and
    • a decrease in the value of the asset by name Bills Receivable (B/R) in the books of the consignee.

• Taking over a liability of the consignor by the consignee

  The amount paid by the consignee to the consignor may be by taking over a liability of the consignor. Taking over a Bills Payable, accepting a bill drawn by the consignor are some examples.

  • Consignee accepting a Liability

    The consignee may accept to discharge a liability, say Bills Payable (B/P) of the Consignor. This creates a new liability for the consignee and discharges the liability in the books of the consignor.

    This results in

    • a decrease in the value of a liability (Bills Payable), in the books of the consignor
    • an increase in the value of the liability (Bills Payable), in the books of the consignee.

  • Consignee accepting a Bill

    The consignee accepts a bill drawn by the consignor, making him the drawee and the consignor the drawer, of the bill.

    This results in an increase in the value of

    • an asset by name Bills Receivable (B/R) in the books of the consignor and
    • a liability by name Bills Payable (B/P) in the books of the consignee.

The consignee, may transfer funds by paying cash, sending a bank draft, accepting a bills payable drawn by the consignor, endorsing a bills receivable, or taking up a bill payable of the consignor.

Example

1. Advance sent by the consignee

   • in cash 2,000 and
   • through a Bank Draft 10,000
2. Bill drawn by the consignor accepted by the consignee 8,000.
3. Consignee endorsed a Bill receivable with him to the consignor 5,000.
4. Consignor's Bill payable taken over by the consignee 3,000.

Dr/Cr - Transaction analysis

• Credit - Consignee a/c

  Personal
  ↓
  Credit
  {the benefit giver}

  Whatever may be the mode of payment of advance or any other payment received from the consignee, he would stand in the position of a benefit giver.

• Debit -

  Dependent on the mode of receipt.

  • Cash a/c

    Real
    ↓
    Debit
    {what comes in}

    Cash comes in, when amount is received in cash.

  • Bank a/c

    Personal
    ↓
    Debit
    {the benefit receiver}

    Amount received through a cheque goes into the bank account, making Bank the benefit receiver.

  • Bills Receivable a/c (Handing over an asset)

    Real
    ↓
    Debit
    {what comes in}

    Where the receipt is in the form of an asset transferred by the consignee, the asset comes in.

    This would be the case, when

    • a bill receivable by the consignee is endorsed by him.

  • Bills Payable a/c (Taking over a liability)

    Personal
    ↓
    Debit
    {the benefit receiver}

    Where the liability gets cleared by being taken over by the consignee, the account representing the liability would be the benefit receiver.

    This would be the case, when

    • a bill drawn on the consignee is accepted by him and
    • a bill payable is taken over by the consignee

Journal

• Amount received from the consignee in cash

  Cash a/c To Consignee a/c	Dr	2,000	2,000
  [For the cash received the consignee as advance on consignment]

• Amount received from the consignee through a bank draft

  Bank a/c To Consignee a/c	Dr	10,000	10,000
  [For the advance received from the consignee through a bank draft]

• Bill drawn on the consignee accepted by him

  Bills Receivable a/c To Consignee a/c	Dr	8,000	8,000
  [For the bill accepted by the Consignee]

• Endorsed Bills Receivable received from the consignee

  Bills Receivable a/c To Consignee a/c	Dr	5,000	5,000
  [For the Bills Receivable from M/s Juno Traders endorsed by the Consignee]

• Bills Payable taken over by the consignee

  Bills Payable a/c To Consignee a/c	Dr	3,000	3,000
  [For the bill payable to M/s Gramt Enterprises taken over by the Consignee]

Ledger

Consignee a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Cash a/c By Bank a/c By Bills Receivable a/c By Bills Receivable a/c By Bills Payable a/c	2,000 10,000 8,000 5,000 3,000

Note

Cash a/c, Bank a/c, Outstanding Expenses a/c etc., are accounts affected by transactions other than consignment transactions. They are accounts which are common to all kinds of business activities of the organisation.

In problem solving, we ignore presenting these ledger accounts, as the information in those accounts would be only partly relevant to consignment, and to be able to draw up those accounts, we would need other information unrelated to consignments, which may not be available in most cases.

Dr/Cr - Transaction analysis

• Debit - Consignor a/c

  Personal
  ↓
  Debit
  {the benefit receiver}

  Whatever may be the mode of payment of advance or any other payment made to the consignor, he would stand in the position of a benefit receiver.

• Credit -

  Dependent on the mode of payment.

  • Cash a/c

    Real
    ↓
    Credit
    {what goes out}

    Cash goes out, when amount is sent in cash.

  • Bank a/c

    Personal
    ↓
    Credit
    {the benefit giver}

    Amount paid through a cheque goes out of the bank account, making Bank the benefit giver.

  • Bills Receivable a/c (Handing over an asset)

    Real
    ↓
    Credit
    {what goes out}

    Where the payment is made by transfer of an asset, it goes out.

    This would be the case, when a bill receivable in the books is endorsed to the consignor.

  • Bills Payable a/c (Taking over or Assuming a liability)

    Personal
    ↓
    Credit
    {the benefit giver}

    Where a liability is being assumed or taken over from the consignor, the account representing the liability would be a benefit giver.

    This would be the case, where

    • a bill drawn by the consignor is accepted and
    • a bill payable of the consignor is taken over.

Journal

• Amount sent to the consignor in cash

  Consignor a/c To Cash a/c	Dr	2,000	2,000
  [For the cash paid to the Consignor towards advance]

• Amount sent to the consignor by a Bank Draft

  Consignor a/c To Bank a/c	Dr	10,000	10,000
  [For the advance paid to the Consignor by a bank draft]

• Bill drawn by consignor accepted

  Consignor a/c To Bills Payable a/c	Dr	8,000	8,000
  [For the Bill drawn by the Consignor accepted]

• Bill Receivable endorsed to the consignor

  Consignor a/c To Bills Receivable a/c	Dr	5,000	5,000
  [For the Bill Receivable endorsed to the Consignor]

• Bill Payable of the consignor taken over

  Consignor a/c To Bills Payable a/c	Dr	3,000	3,000
  [For the Bill Payable by the Consignor taken over]

Ledger

Consignor a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Cash a/c To Bank a/c To Bills Payable a/c To Bills Receivable a/c To Bills Payable a/c	2,000 10,000 8,000 5,000 3,000

Note

Even for the consignee, Cash a/c, Bank a/c, Outstanding Expenses a/c etc., are accounts affected by transactions other than consignment transactions. They are accounts which are common to all kinds of business activities of the organisation.

In problem solving, we ignore presenting these ledger accounts, as the information in those accounts would be only partly relevant to consignment, and to be able to draw up those accounts, we would need other information unrelated to consignments, which may not be available in most cases.