Designing an accounting system for an organisation starts with identifying the information needs of the organisation and then deciding on the account heads to be maintained for the purpose of deriving that information from the system.

Therefore, the first aspect to be paid attention to is the information needs of the organisations involved in the consignment business. information from the system.

There are two possibilities with respect to the organisation that is entering into the consignment business. It may be the case with either the consignor or the consignee or both.

New Organisation

It may be a new organisation starting its business activities with the consignment business, in which case, all the account heads required for the purpose of the accounting system are to be created anew.

In such a case we create the accounting system with all the required accounts, to enable recording transactions relating to consignments and any others required for the business opearations.

Existing Organisation

There may be an organisation conducting business operations which is expanding its operations and getting into the consignment business, in which case, the consignment business would be a part and parcel of the existing business.

As such, accounting heads like Cash a/c, Bank a/c etc., which exist in the books of accounts, need not be created again. Only those accounts that are needed in addition to the existing accounts are required to be created anew for the purpose of accounting system serving the needs of the consignment business.

In such a case we try to modify the existing accounting system to enable recording transactions relating to consignments also.

Where we use Cash a/c in recording a transaction relating to consignments, we should understand that we are using the already existing Cash a/c and it is need not being created again for the purpose of recording consignment transactions.

The Consignor (M/s Innova Steels) and the Consignee (M/s Maruthi Traders) are two different business entities.

Each of these business organisations use a distinct accounting system for ascertaining the profits out of their activities.

The consignment business, that is now intended to be carried on, may be their sole activity or it may be something that is being done in addition to their already existing businesses.

Distinct books of accounts for each Party

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.

The position of both the parties with regard to the transactions is not the same. Each party has its own set of accounting records.

Consignor's Books

The Consignor bears all the expenses of the business and is the person who bears the complete risk in the business.

He therefore retains all the profits of the business. His decisions relating to the consignment business are based on the profit that is being made from the consignment business.

The consignor, thus, records all the transactions relating to the business in his books of accounts.

Consignee's Books

The consignee has very little risk in the business. He does not bear any expenses in relation to the consignment business, except under special circumstances.

His income from the business is the commission he earns from the sales made on consignment. He takes his decisions relating to the consignment business (as a consignee) based on the commission he earns.

The consignee, thus, with regard to the consignment business, records only those transactions which affect his commission, or transactions where he becomes due to the consignor or others, or where someone else becomes due to him, on account of the transaction relating to the consignment.

Effect of a transaction

The effect of a transaction on both the consignor and the consignee would not be the same.

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

We need to learn about, the account heads maintained in each of the books, and the account heads that are affected on account of various transactions relating to consignment.

For the purpose of the following explanations, let us assume that both the consignor and the consignee have existing businesses for which there is a system of accounting and the transactions relating to consignment are also to be recorded in the same set of books.

To enable recording the transactions relating to the consignment business, the existing accounting system is modified by including new accounting heads in the list of existing accounting heads.

Account Heads to be Created

The account heads to be created and included in the existing accounting system depends on whose books (consignor's or consignee's) we are taking into consideration and the information that the organisation intends to derive from the accounting system.

Consignor's Books

a/c Head	Type
Consignment a/c	Nominal
Consignee a/c	Personal
Goods Sent on Consignment a/c	Nominal
Stock on Consignment a/c	Real
Consignment Debtors a/c	Personal
Consignment Bad Debts a/c	Nominal
Stock Reserve a/c	Special Nominal

Consignee's Books

a/c Head	Type
Consignor a/c	Personal
Ordinary Commission a/c	Nominal
Del Credere Commission a/c	Nominal
Overriding Commission a/c	Nominal
Special Commission a/c	Nominal
Consignment Debtors a/c	Personal
Consignment Expenses a/c	Nominal
Consignment Bad Debts a/c	Nominal
Consignment Income a/c	Nominal

These account heads would be required where they wish to derive substantial information from the accounting system.

Where the information needs of the organisation are minimum, it may manage with the following account heads.

Consignee's Books

a/c Head	Type
Consignor a/c	Personal
Commission a/c	Nominal
Consignment Debtors a/c	Personal
Consignment Expenses a/c	Nominal