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Accounting Heads in Consignor Books

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New Account Heads in Consignor Books

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

1. Consignment a/c

  • Nature:

    Nominal Account
  • Purpose:

    "accountancy,basic,financial,accounting,process"
    To give the information relating to the profit/loss made on account of the transactions of consignment.
    [Any account that is used for deriving the profit or loss made from a set of transactions is a nominal account]

    The Consignor who already has an existing business would need to derive information in such a way that it would help him decide whether it would be beneficial for him to continue selling in this method or not. For this he needs to find the profit or loss made on this business separately. This information is provided by "Consignment a/c."

    The postings to this account are based on the principles of debit and credit for nominal accounts. All the expenses/losses relating to consignment are debited and all the incomes/gains relating to consignment are credited to this account. This is another income and expenditure account for transactions relating to consignment. Therefore, whatever expenses/losses we come across in relation to consignment are debited to the "Consignment a/c". Whatever incomes/gains we come across in relation to consignment are to be credited to the "Consignment a/c".

  • Account Head Name Prefixed by location name

    Where there are a number of places at which such a kind of business relation is being carried on with either only one consignee or with different consignees, a separate account for each location would be opened. This would enable the consignor to decide whether consigning to a particular location would be profitable or not.

    Therefore it has become a convention to prefix the name "Consignment a/c" with the name of the place to which the goods are being consigned. (Eg: Mumbai Consignment a/c, Vijayawada Consignment a/c, Delhi Consignment a/c, etc.,).

  • Consignment a/c ≡ Trading a/c

    "Trading a/c" gives the information relating to the Gross profit made in trading business. The information from the trading account enables an organisation to assess whether the business is profitable or not. Gross profit is the profit out of the trading operations. Similarly the consignment account enables the organisation to decide whether the consignment business is profitable or not. The "Trading a/c" and the "Consignment a/c" are on the same level. Trading a/c pertains to trading business, while Consignment a/c pertains to the consignment business. Therefore, in dealing with consignment a/c, this comparison would sometimes give an easy understanding.

    One should note that for every specialised area of operations like Joint ventures, Branch etc., a seperate nominal account is used to ascertain the profit or loss from those operations. The profits from all these is carried to the "Profit & Loss a/c" and after setting off the indirect expenses, the net profit is derived from the "P & L a/c". Whatever may be the number of accounts like "Trading a/c", "Consignment a/c", "Joint Venture a/c" etc., there would be only one "P & L a/c" for an organisation.

2. Consignee a/c

  • Nature:

    Personal Account
  • Purpose:

    To give the information relating to the amount due from or due to the consignee.

    The account heads are named after the person or organisation acting as the consignee. [Eg: Ghan Shyam a/c, M/s Maruthi Traders etc]. In cases where the goods are being consigned to more than one place, the organisation may be dealing with more than one consignee. Therefore this method of identifying the consignee with their names would be useful in all cases.

    Where the same person/organisation is acting as the consignee at different places, different accounts for different places may be maintained for the convenience of operation. In such cases, the name of the place would be indicated in brackets after the name of the consignee in the account heads. [Eg: M/s Maruthi Traders [Vijayawada]; M/s Maruthi Traders [Mumbai]; etc.].

    Remember "The more information we need the more accounting heads we have to maintain".

5. Consignment Debtors a/c

  • Nature:

    Personal Account
  • Purpose:

    To give the information relating to the amount due from the persons to whom the consignee has sold the goods on credit.

    People who owe us money are our Debtors. In Consignment business, ownership of the goods involved in the business lies with the consignor. The sales are made by the consignee on behalf of the consignor. Therefore the people to whom the consignee sells the goods on credit would be due to the consignee. However, since the ownership of the goods lies with the consignor, they are effectively the consignor's debtors. If the consignor does not wish to maintain this information (since he does not deal wtih them directly) then the consignee account itself can be used in place of this account. Wherever a credit sale is made, the consignor would assume that the consignee should pay him instead of some third party.
    Eg: The consignee at Mumbai has sold to a customer on credit with the prior approval of the consignor, goods for Rs. 50,000.
    "accountancy,basic,financial,accounting,process"
    The consignor can interpret the transaction as sale made by the consignee and amount still due to be received (like other cash sale transactions) from the consignee.

    He can also interpret this transaction as Sale made by the consignee to a Debtor. When he receives the information that the Debtor has paid either the full or part of the amount due to the consignee then he will consider the consignee as the person who is due to him to the extent he has received payment from the consignment debtor.

    For this sort of interpretation he needs to maintain the "Consignment Debtors a/c" separately. This will give him an idea of the cash with the consignee that is due to be received (through the balance in his account). We have to note that the consignee cannot pay the cash in relation to the credit sale he made without having received it from the debtors (customers to whom he sold the goods on consignment).

3. Goods Sent on Consignment a/c

  • Nature:

    Nominal Account
  • Purpose:

    To give the information relating to the value of goods used for all the consignment businesses together from the beginning of the accounting period till date.
  • Why do we need this account at all?

    Recollect the Trading Account.

    Consider the trading account being made in two stages.
    DrTrading a/cCr
    Particulars J/F Amount
    (in Rs)
    Particulars J/F Amount
    (in Rs)
    To Opening Stock a/c
    To Purchases a/c
    To Direct Expenses a/c


    50,000
    5,82,000
    1,17,000
    By Closing Stock a/c
    By Cost of Goods Sold c/d

    72,000
    6,77,000
    Total   7,49,000 Total   7,49,000
    To Cost of Goods Sold b/d
    To Gross Profit c/d

    6.77,000
    1,77,000
    By Sales a/c 8,54,000
    Total   8,54,000 Total   8,54,000

    If you balance the Trading account without having credited sales it would show a debit balance which is nothing but the cost of goods sold. We know,

    Cost of Goods Sold = Sales − Gross Profit.

    If you go through the account, you will be able to arrive at another definition for Cost of Goods Sold.

    Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses − Closing Stock

    What information does the Trading a/c give?

    The trading account gives the basic profit (called Gross Profit) made out of the transactions of business. It is the difference between the Sale Proceeds received and the Value of goods which have been sold (Value does not mean just the cost of purchase. It also includes direct expenses.). This value of goods sold is what is called Cost of Goods Sold.

    Why do we deduct the value of closing stock

    Take the above example, there was an opening stock of Rs. 50,000. Then goods costing Rs. 5,82,000 were purchases on which there was a direct expenditure of Rs. 1,17,000. This would make the total value of the goods available as Rs. 7,49,000. Had all the stock been sold, then the value of goods sold i.e cost of goods sold would have been Rs. 7,49,000. Goods valued Rs. 72,000 are still lying in stock, indicates that they have not yet been sold. ∴ the value of goods sold would be this much lesser than the total value of stock possessed.

    This gives us the reason why we deduct the value of closing stock from the total value of stock with us. It is to find the cost of goods sold. Alternatively we can also say that "since the closing stock has not been used in the trading business, we eliminate its value from the cost relevant to the business".

    For the purpose of understanding let us use the wordings "we have eliminated the value of closing stock from the trading account (i.e. the total cost incurred for the trading business), since that much value has not been actually expended for the trading business". This implies that trading account should reflect profit made out of trading transactions and any loss/cost which is not relevant to it should be eliminated from it. Since Cost/expense is debited to trading account we eliminate it by crediting the value to be eliminated to the trading account. This amounts to transferring a debit balance from "Trading account" to some other account.

    Crediting (or Deducting from) Purchases a/c = Crediting (or Deducting from) Trading a/c

    The total balance in the purchases account at the end of the accounting period is transferred to the "Trading a/c", which results in the "Trading a/c" being debited. Therefore if we credit any amount to "Purchases a/c", it would amount to reducing the debit being transferred to the "Trading a/c" which is the same as Crediting the "Trading a/c".

    In all those instances where the "Trading a/c" has to be credited, we see that crediting "Purchases a/c" is an alternative provision. This is because, we create the "Trading a/c" only towards the end of the accounting period at the time of preparation of final accounts. If we feel the need to credit the "Trading a/c" somewhere in between the accounting period, the alternative would be to credit the "Purchases a/c". Say when you want to record the entries for "Drawings of stock", or when we want to pass the journal entry for closing stock before preparing the "Trading a/c" etc.

    Other Instances

    There are many such instances that you come across in accounting, especially at the time of final accounting, where you identify that stock which has been debited to the trading account as expenditure has not been used for trading purposes. In all such instances we will have to eliminate such costs from trading account by crediting the trading account.
    • Goods withdrawn by the proprietor for personal purposes:

      The goods being taken away by the proprietor would amount to the goods not being used for the trading business. Therefore it is eliminated by deducting it from purchases. (Crediting Trading account would be the same as deducting from an item on the Debit side of Trading account).
    • Goods Lost on account of Fire:

    • Goods used for constructing an asset:

      The goods being used up in building an asset would amount to the goods not being used for the trading business. Therefore it is eliminated by crediting the trading account with "Asset" account i.e. by transferring the debit balance to the "Asset" account.

    Using the goods for consignments

    The consignor would purchase goods regularly and would debit the purchases account with the value of goods purchased. It is always assumed that the Consignor sends goods to the Consignee from his stock. Even if the goods are specifically purchased for the purpose of consignments, we assume that they are debited to the "Purchases a/c" first and transferred to consignments thereon.

    This means that the value of goods which has been debited to purchases account has been used for consignments. Therefore, this value of goods which has been used for consignments (i.e. not used for the trading business) have to be eliminated from the trading account. This is done by crediting the Trading/Purchases account.

    If this is to be done every time the goods are sent to the consignee then there may be a number of postings on the credit side of "Purchases a/c" which would make the accounting cumbersome. Therefore to eliminate this and to collect the information relating to the total value of goods sent on consignment basis, the "Goods Sent on Consignment a/c" is credited. We can assume a credit in this account to be one that is made in place of a credit in either "Trading a/c" or "Purchases a/c".

    The Goods Sent on Consignment a/c would therefore show a credit balance and would indicate the value of goods sent on consignment basis from the beginning of the accounting period to that date. Conventionally, this account is closed at the end of the accounting period by transferring the balance to the "Trading a/c" which gives the required effect in the trading account.

    Unlike the "Consignment a/c" which is distinct for each separate location to which goods are consigned, the "Goods Sent on Consignment a/c" is only a single account for all the consignments.

4. Stock on Consignment a/c

  • Nature:

    Real Account
  • Purpose:

    To give the information relating to the value of goods with the consignor at the end.

    The Consignor owns the stock with the consignee. It is stock whose ownership lies with the consignor but is physically located elsewhere.

    Whenever Goods/Stock are purchased, the value of purchase is debited to "Purchases a/c" i.e. we are treating the amount spent on the goods as expenditure. This happens all through out the year.

    However at the time of preparation of the Balance Sheet we consider the Goods/Stock with us as an asset. Only for the purpose of ascertaining the value of our assets and liabilities we treat stock as an asset. That is why "Closing Stock a/c" is created at the end of the accounting period.

    While taking the value of closing stock into account we do not consider the stock with consignee because "The value of closing stock is ascertained by the physical verification of the stock at the end of the accounting period and its valuation at cost or market price whichever is lesser".

    Therefore the stock with the consignee is separately accounted for as an asset at the end of the accounting period using the "Stock on Consignment a/c". This will enable the organisation to see the value of stock which is physically with us and the value of stock which is physically with others separately. Remember: "The more the information we need the more accounting heads we have to maintain."

6. Stock Reserve a/c

  • Nature:

    Special Nominal Account
  • Purpose:

    To give the information relating to the value of unrealised profit included in the value of closing stock with the consignee.

    If the consignor is recording the values of the stocks being sent to the consignee at an invoice price i.e. a price which includes a certain element of profit (Invoice Price = Cost Price + Profit Loading), then the value of closing stock would not be at cost. It would include a certain element of profit which is called loading.

    Crediting the Consignment a/c with the loaded value of closing stock on consignment will result in the Consignment a/c showing a higher profit on consignment. This additional profit is unearned profit and has to be eliminated from the accounts to ascertain the true profits of the business. The profits of the consignment business are therefore, reduced by creating a reserve to the extent of loading on the closing stock on consignment.

    Reserves are created by charging profits. Creation of reserves would amount to appropriation of profits. In a similar way the "Stock Reserve a/c" is also created by debiting the "Consignment a/c" i.e. by charging the profits of the consignment business.

Special Nominal Accounts

There is no such classification as "Special Nominal Accounts" as such. It is a classification that we use to create a better understanding. Normally all the nominal accounts are closed at the end of the accounting period, by either transfer to the "Trading a/c" or the "Profit and Loss a/c" as the case may be. But there are some nominal accounts which are not closed this way. Their balances are carried forward to the next accounting periods and are shown in the balance sheets. Reserves and Provisions are one best example for this. Accounts like "General Reserve a/c", "Provision for Bad Debts a/c", "P & L appropriation a/c" which appear in the Balance Sheet.

Therefore we classify those nominal accounts which are carried forward to the next accounting periods or which are shown in the balance sheet as special nominal. The "Stock Reserve a/c" is one such account.

Author Credit : The Edifier ... Continued Page 4

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