Accounting Heads in Consignor Books

New account heads in Consignor books

The account heads that are to be created in the books of the consignor are

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

Consignment a/c

Nature

Consignment a/c is a Nominal Account

Purpose

To derive the information relating to the profit or loss, made on account of the transactions of consignment.

An account that is used for deriving the profit or loss made out of a set of transactions is a nominal account

Explanation

The Consignor, who has an existing business, needs to derive information relating to the profit or loss from the consignment business distinctly. This information would help him decide whether it would be beneficial to carry on selling under consignment method or not. Consignment a/c provides this information.

This is the only income and expenditure account relating to the consignment in the books of the consignor.

Since it is a nominal account, 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.

Prefixes for Account name

Where there are a number of places or entities with which such a business relation is being carried on, a separate account for each entity or location would be maintained. This enables the consignor to derive the information relating to each entity or place distinctly, which would enable him to take decisions relating to each entity or location based on its own profitability.

Conventionally the name of the place to which the goods are being consigned is used as a prefix along with the word Consignment to indicate the consignment account relating to that place (Eg: Metro Consignment a/c, City Consignment a/c, STown Consignment a/c, etc.,).

Consignment a/c ≡ Trading a/c

Trading a/c and Consignment a/c are accounts which provide similar kind of information. Trading a/c pertains to trading activities, while Consignment a/c pertains to the consignment activities.

Trading a/c

Trading a/c gives the information relating to the profit or loss made out of transactions relating to the trading activities. Such profit or loss is called Gross Profit or Loss. This information enables the organisation to assess the profitability of its trading activities.

Consignment a/c

Consignment a/c gives the information relating to the profit or loss made out of transactions relating to the consignment activities. There is no specific term used to identify such profit or loss. This information enables the organisation to assess the profitability of its consignment activities.

This understanding may be helpful in analysing some transactions relating to consignment and identifying the accounts that are affected by the transaction.

A Single Profit and Loss a/c

For every specialised area of operations like Consignments, Joint ventures, Branch etc., a separate nominal account is used to ascertain the profit or loss from those operations.

The profit or loss from all those accounts are transferred to the Profit & Loss a/c. Thereafter, after setting off indirect expenses and losses, net profit is derived from the Profit and Loss 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 Profit and Loss a/c for an organisation.

Consignee a/c

Nature

Consignee a/c is a Personal Account

Purpose

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

Explanation

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 the same consignee or different (more than one) consignees.

The method of identifying the consignees with their names would be useful in all cases.

Same Consignee - Multiple Accounts

Where the same person/organisation is acting as the consignee at different places, different accounts for different places may be maintained, to enable deriving the information relating to each place distinctly.

Basic Purpose of Accounting

The basic purpose of accounting is derivation of information. The more information we need the more accounting heads we have to maintain.

In such cases, the name of the place would be included in the account head either as a prefix or suffix to enable distinct identifications.

Eg: M/s Maruthi Traders Metro ; M/s Maruthi Traders City; etc.

Consignment Debtors a/c

Nature

Consignment Debtors a/c is a Personal Account

Purpose

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

Isn't Consignee the Debtor?

People who owe money to the organisation are its Debtors.

In Consignment business, ownership of the goods involved in the business lies with the consignor.

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. Consignee is only a middle man who collects the dues and passes them on to the consignor.

Since the ownership of the goods lies with the consignor and consignee only acts as a collector, the persons who are due to the consignee are effectively the consignor's debtors.

Explanation

The consignor and the consignee agree to it that the consignee would be selling consigned goods on credit. The consignee sells goods to a customer on credit.

The Consignor treats this transaction as Sale made to a Debtor (by the consignee). To enable this treatment, a Consignment Debtors a/c would be maintained in the Consignor books.

Transaction Consignee Consignment
Debtor
Cash Sale +5,000
Credit Sale +15,000
Cash Collected +8,000 −8,000
Balance +13,000 +7,000

On receiving information that the Consignee has received payment from the Debtor, the due is transferred from the Debtors name to the Consignees name to the extent the payment is received.

The balance in the Consignment Debtors a/c represents credit sales not yet collected. The balance in the Consignee a/c represents the amount of cash collected by the consignee which would include the cash sale proceeds as well as the payments received from Debtors.

The consignee cannot pay cash in relation to credit sales made without having received it from the Consignment Debtors

Using Consignee a/c in place of Consignment Debtors a/c

If the consignor does not wish to maintain the information relating to the amounts due from consignment debtors distinctly, since he does not deal with them directly, he would record all sales including credit sales as sale made by consignee, indicating the the consignee is due to the extent of total sales made.

Transaction Consignee
Cash Sale +5,000
Credit Sale +15,000
Balance +25,000

This amounts to treating the credit sale on par with the cash sales made by the consignee. Whenever a credit sale is made, the consignor would assume that the consignee would be receiving the cash and would pay him, instead of some third party being due to him.

The effect of this would be using the Consignee a/c in place of the Consignment Debtors a/c for recording credit sales.

Consignment Bad Debts a/c

Nature

Consignment Bad Debts a/c is a Nominal Account

Purpose

To derive the information relating to the loss on account of bad debts incurred in relation to the consignment business.

Explanation

The balance in this account represents the amount uncollected from the Consignment Debtors which had to be written off as bad during the current accounting period.

This account would be required only if there are credit sales on consignment.

Goods Sent on Consignment a/c

Nature

Goods Sent on Consignment a/c is a Nominal Account

Purpose

To derive the information relating to the value of goods used for all the consignment businesses during the accounting period (from the beginning of the accounting period till that time).

Explanation

All purchases debited to Purchases a/c

To have a clear idea of the purpose of the Goods Sent on Consignment a/c, assume that the organisation records all purchases of stock through the Purchases a/c and then transfers the stocks it uses for the Consignment or other businesses from that stock.

Recording periodic transfers to Consignment

The periodic transfers of goods to the consignee for the purpose of consignment should have to be recorded as and when they are transferred.

Journal in the books of M/s Trinity Foods
for the period from 1st June _5 to 30th June _5
Particulars Amount
(Dr)
Amount
(Cr)
Consignment a/c
To Purchases a/c
Dr

[For the value of goods used for Consignment purposes by transfer to the consignee]

The purchases account would reveal the net balance left after deducting the value of goods used for consignment business.

If we intend to make the purchases a/c reveal the value of total purchases made during the accounting period, then this periodic recording should be avoided.

Recording periodic transfers in a separate account

The value of goods used for consignment business is recorded in a separate account, Goods sent on Consignment a/c. Whenever there is a transfer of goods for consignment, this account, the GSC a/c, is credited in place of Purchases a/c.

Journal in the books of M/s Trinity Foods
for the period from 1st June _5 to 30th June _5
Particulars Amount
(Dr)
Amount
(Cr)
Consignment a/c
To Goods Sent on Consignment a/c
Dr

[For the value of goods used for Consignment purposes by transfer to the consignee]

The Goods Sent on Consignment a/c shows a credit balance which indicates the value of goods sent on consignment during the accounting period.

Both the Purchases a/c and the Goods Sent on Consignment a/c are closed at the end of the accounting period by transferring their balances to the Trading a/c. This results in leaving the Trading a/c with a balance equal to the value of goods used for trading activities.

Single account for all Consignments

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

Trading a/c - Goods used for Consignments

Stock on Consignment a/c

Nature

Stock on Consignment account is a Real Account

Purpose

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

Explanation

The ownership right on the stock with the consignee lies with the consignor. It is stock owned by the consignor but physically located elsewhere.

The value of Closing Stock is ascertained by Physical Verification of Stock on the last day of the accounting period and its valuation at Cost or Market Price (Net Realisable Value) whichever is lesser

Since the Goods with the Consignee are not physically present in the Consignors premises, the value of Closing stock does not include the value of the stock with consignee.

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 have the information relating to the value of stock physically present with them and the value of stock physically with others, separately.

Basic Purpose of Accounting

The basic purpose of accounting is derivation of information. The more information we need the more accounting heads we have to maintain.

If this information is not needed the value of stock with the consignee may also be included in the value of closing stock by debiting it to the Closing Stock a/c.

Stock Reserve a/c

Nature

Stock Reserve account is a Special Nominal Account

Purpose

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

Explanation

Invoice Price = Cost Price + Profit Loading

Recording the value of closing stock would result in the Consignment a/c being credited with the value of stock on consignment.

Journal in the books of M/s Trinity Foods
for the period from 1st June _5 to 30th June _5
Particulars Amount
(Dr)
Amount
(Cr)
Stock on Consignment a/c
To __ Consignment a/c
Dr

[For bringing the value of stock unsold with the consignee into books]
Consignment a/c
Dr Cr
Particulars Amount Particulars Amount


To P/L a/c


80,000
 


By Stock on
Consignment a/c



20,000

If the consignor is recording the values of goods sent on consignment at an invoice price, then the value of closing stock may also be including a certain element of profit (sometimes called loading) in it.

Consider 24,000 (Invoice Price)

= 20,000 (Cost Price) + 4,000 (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. The additional profit revealed by the consignment a/c represents unearned profit which would/may be earned in the subsequent accounting period when the closing stock of the current period is sold.

Consignment a/c
Dr Cr
Particulars Amount Particulars Amount


To P/L a/c


84,000
 


By Stock on
Consignment a/c



24,000

An increase of 4,000 on the credit side will result in an increase of 4,000 on the debit side.

To ascertain the true profits of the business, such unearned profits included in it should be eliminated/reduced. The loading on closing stock represents unearned profits of the consignment business as revealed by the Consignment a/c.

These unearned profits are transfered from the Consignment a/c to a separate account by name Stock Reserve a/c

This amounts to creating a reserve to the extent of loading on the closing stock on consignment.

Creation of a Reserve

Though, reserves are created by charging profits, creation of a reserve amounts to appropriation of profits and not a charge on profits.

Consignment a/c
Dr Cr
Particulars Amount Particulars Amount


To Stock Rserve a/c
To P/L a/c


4,000
80,000
 


By Stock on
Consignment a/c



24,000

Stock Reserve a/c is created by charging profits of the consignment business i.e. by debiting the Consignment a/c.

Special Nominal Accounts

Special Nominal Account is a term that we use to help understanding the presence of nominal accounts in balance sheet. There is no such account type.

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. There are some nominal accounts which are not closed this way. Their balances are carried forward to the subsequent accounting periods and are shown in the balance sheets.

Eg: Reserves and Provisions (General Reserve a/c, Provision for Bad Debts a/c, P & L appropriation a/c, etc.).

Nominal accounts which are not closed at the end of the accounting period and whose balances are carried forward from one accounting period to another are Special Nominal accounts.

Balances of these accounts, appear in the balance sheet along with the other Real and Personal account balances.

Stock Reserve a/c is one such account.