Invoice

• An itemized statement of money owed for goods shipped or services rendered
• a bill
• account
• statement of account

Invoice Price

In Consignment accounting, by invoice price we mean a price that is used in the invoice sent to the consignee, which includes an element of profit in it.

Invoice Price

> Cost Price

= Cost Price + Profit

The addition to the cost price to make up the invoice price is called profit or profit loading or loading. The invoice price is also called a loaded price.

Any price that is used in the Invoice would be the invoice price, qualifying the cost price also to be called the invoice price. The term Invoice price, in the context of consignment accounting, is used conventionally, to mean a price that is loaded.

Memorandum Invoice

Memorandum

• A written proposal or reminder
• Something to be remembered
• memo
• note

The consignee is required to sell the goods and pass on the sale proceeds to the consignor after deducting what is due to him towards commission and expenditure reimbursements. Thus the consignee is not due till the goods are sold. As such the invoice in reality is a memorandum invoice and the value information in it is not needed by the consignee as he does not record the value of the goods in his books of accounts.

Though the consignee is not responsible for the realisation of the value of the consigned goods, he would be responsible for safeguarding the physical stock. Thus the quantity information in the invoice would be useful to the consignee in accounting for the inventory of the consigned goods.

The value information relating to consigned goods, included in the memorandum invoice, would be of utility in certain circumstances.

• Fixing selling price

  Invoiced Price is cost price.

  Where the sale price of the goods consigned keeps varying and is to be based on the value of the goods consigned, the invoice price would be helpful to the consignee in arriving at the sale price.

  Say, sale price is to be arrived at by adding a certain percentage to the invoiced price.

  Sale Price

  = Invoiced Price + 25%

• Specifying Selling price

  Invoiced Price is selling price.

  Where the sale price of the goods consigned keeps varying and the profit is not a fixed percentage or proportion of the cost, then it would be required of the consignor to communicate to the consignee the information relating to the percentages, proportions, or fixed amounts to be used as profits for arriving at the selling price, every time the goods are consigned.

  In such a case, it would be easier for the consignor to specify the price at which the goods are to be sold as the invoiced price rather than mentioning the cost price and asking the consignee to make calculations to arrive at the selling price. The consignee can straight away use the invoiced prices as the selling prices.

• Masking Cost price

  Invoiced Price is selling price.

  The consignee earns commission on selling the consigned goods. The commission that the consignee negotiates from the consignor would be based on the price at which the goods are being sold as well as the profit that the consignor would be making from the sale of such goods. The more the profit the consignor makes, the greater the commission that the consignee may ask for.

  Say the consignee is selling a consigned product as follows.

  • Invoiced price = 40 (Cost)
  • Selling price = 50
  • Commission @4% of Selling price = 2 (50 × 4%)
  • Profit = 10 (50 − 40) which is 25% of cost

  For a new product being introduced,

  • Invoiced price = 50 (Cost)
  • Selling price = 75
  • Commission @4% = 3
  • Profit = 25 (75 − 50) which is 50% of cost

  If the consignee comes to know that the consignor is making a profit of 50% of cost unlike in the earlier case where he was making onlu 25% of cost as profit, he may demand higher commission.

  So as to mask the information relating to profits, the consignor may load the cost price with a notional profit and invoice the goods at the loaded price as the invoiced price.

  Details relating to the new product invoiced at loaded price:

  • Invoiced price

    = Cost + loading

    = 50 + 10

    = 60

  • Selling price = 75
  • Commission @4% = 3
  • Profit = 15 (75 − 60) which is 25% of cost

  The consignor could mask the original cost price by invoicing at the loaded price.

Since invoiced price includes an element of profit in it, where invoiced price is being used as the transaction value, it amounts to recording a transaction with an inflated value. Such a recording may result in a gain or loss, both of which are notional.

Difference

To understand the difference in considering the cost value and loaded value as the transaction value, consider the following transaction of goods being consigned.

Eg: 1,000 units costing 50 each have been invoiced at 60 each.

Value of goods consigned

Particulars	Quantity (in units)	Rate (val/unit)	Amount (value)
Goods Consigned at Loaded Price at Cost Price	1,000 1,000	60 50	60,000 50,000
Loading		10	10,000

Since the value of the transaction is being differed, both the ledger accounts affected by the transaction would be affected. The transaction value would differ by the amount of loading.

Consignment a/c To Goods sent on Consignment a/c	Dr	–	–
[For the value of goods consigned]

• based on Cost Price

  Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Goods sent on Consignment a/c	50,000

  Goods sent on Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Consignment a/c	50,000

• based on Invoiced or Loaded Price

  The debit and credit are greater by the loaded value i.e. 10,000.

  Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Goods sent on Consignment a/c	60,000

  Debited by 10,000 in excess, resulting in a greater charge of expense to the consignment business.

  Goods sent on Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Consignment a/c	60,000

  Credited by 10,000 in excess, resulting in a greater reduction of expense for the trading business.

Effect of using loaded price

The higher debit in the Consignment a/c would result in an excess expenditure being charged to the consignment business.

Goods sent on Consignment a/c is closed at the end of the accounting period by transfer to the Trading a/c.

Goods sent on Consignment a/c To Trading a/c

Dr

–

–

• at Cost

  Trading a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Goods sent on Consignment a/c	50,000

• at Loaded Price

  Trading a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Goods sent on Consignment a/c	60,000

  The higher credit in the Goods sent on Consignment a/c would result in an excess credit to the trading business.

  This effectively results in a charge equal to the loading in the value of goods consigned, being shifted from the trading account to the consignment.

Effect

The effect of recording a transaction with the loaded value can be assessed by the posting to the Consignment a/c.

• Consignment a/c debited

  If the consignment a/c is debited in the transaction, it will result in a greater charge on the consignment and thus a lesser consignment profit.

• Consignment a/c credited

  If the consignment a/c is credited in the transaction, it will result in a greater income or gain being recorded in the consignment account and thus a greater consignment profit.

Rectification - Adjustment

To ensure that the loaded price used in recording a transaction does not result in erroneous data from the accounting system, the effect of loading is reversed immediately by recording a reverse entry with loading as the transaction value.

Goods sent on Consignment a/c To Consignment a/c	Dr	10,000	10,000
[For the loading in the value of goods consigned written off]

The reverse entry is an exact opposite of the entry that is recorded with the loaded value.

Transactions which use the invoiced price as transaction value would be the ones that are affected by use of invoice pricing. Transactions related to and involving goods consigned may be recorded using the invoice pricing, but not all of them are so recorded.

Transactions with the respective rectification or reversal entry are:

• Goods sent on consignment

  The invoice that is sent to the consignee would form the basis for recording the transaction, resulting in the loaded value being taken as the transaction value.

  Consignment a/c To Goods sent on Consignment a/c	Dr
  [For the value of goods consigned]

  As the Consignment a/c is debited, this will result in a lower consignment profit when loaded value is used as the transaction value.

  Reversal entry to eliminate the loading would be

  Goods sent on Consignment a/c To Consignment a/c	Dr
  [For the loading in the value of goods consigned written off]

• Goods returned by consignee

  The memo or return note included with the returned goods would form the basis for recording the transaction. Since the values recorded while goods are consigned are loaded values, this memo would also have the loaded values in it, if at all values are mentioned. Therefore, it would be recorded taking the loaded price as the transaction value.

  Goods sent on Consignment a/c To Consignment a/c	Dr
  [For the value of goods returned by the consignee]

  As the Consignment a/c is credited, this will result in a higher consignment profit when loaded value is used as the transaction value.

  Reversal entry to eliminate the loading would be

  Consignment a/c To Goods sent on Consignment a/c	Dr
  [For the loading in the value of goods returned written off]

• Returns by consignment debtor to the consignor

  The transaction of sales returns by consignment debtor to the consignor is a complex transaction which results in two transactions being recorded in the books of the consignor. One for the sales returns and the other for the return of goods.

  Recording the transaction for return of goods is the same as the transaction for return of goods by the consignee.

• Abnormal Loss of stocks

  The value of loss stock is generally a value that is arrived at through calculations taking into consideration the cost of the stock and the direct expenses incurred on the stock till the point of loss.

  There is no purpose served by using the loaded value or the invoice value in such calculations. Therefore the value of abnormal loss is arrived at by taking the cost value into consideration.

  Thus, even though this transaction is related to the goods consigned, we do not see them being recorded using invoice or loaded value.

• Closing stock on Consignment

  The information relating to the goods or stock unsold with the consignee is received from the consignee. The memo or note providing such information would form the basis for recording the transaction. Since the values recorded while goods are consigned are loaded values, such a memo would also have the loaded values in it, if at all values are mentioned. Even if only the quantitative data is made known by the consignee, the consignor may find it convenient to use the loaded prices to arrive at their values.

  Therefore, this transaction may be recorded taking the loaded price as the transaction value.

  Stock on Consignment a/c To Consignment a/c	Dr
  [For the value of unsold stock with the consignee brought into books]

  As the Consignment a/c is credited, this will result in a higher consignment profit when loaded value is used as the transaction value.

  Stock Reserve a/c

  The entry for adjusting the loaded value would be a distinct entry, unlike in the case of other entries where it is a reversal entry.

  Consignment a/c To Stock Reserve a/c	Dr
  [For the reserve for the unrealised profit]

  Stock Reserve a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Consignment a/c	4,000

  Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Stock Reserve a/c	4,000	By Stock on Consignment a/c	40,000

  This will have the same effect as the reversal with the exception that a new ledger account, Stock Reserve a/c, is created for this purpose. The balance in the stock reserve a/c represents the loading in the value of closing stock on consignment.

The balance in the Stock Reserve a/c represents loading in the value of the closing stock on consignment.

At the end of the accounting period

Stock Reserve a/c is a special nominal account whose balance is carried forward to the subsequent accounting period through the closing entry.

Capital a/c – Loans a/c – Stock Reserve a/c Creditors a/c To Buildings a/c To – To Stock on Consignment a/c To – To Cash a/c

Dr Dr Dr Dr Dr Dr

– – – – 4,000 –

– – 40,000 – –

Stock Reserve a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Balance c/d	4,000	By Consignment a/c	4,000
	4,000		4,000
		By Balance b/d	4,000

It is shown in the balance sheet along with the other accounts whose balance is carried forward. Since it carries a credit balance, it has to appear on the liabilities side of the balance sheet.

Balance Sheet

Liabilities	Amount (value)	Assets	Amount (value)
Stock Reserve	4,000	Stock on Consignment	40,000

Cost value in Balance Sheet

The Stock on consignment a/c would show the value at cost if the balance in the stock reserve account is transferred to it, thereby closing the reserve account.

Stock Reserve a/c To Stock on Consignment a/c	Dr	4,000	4,000
[For the reserve for the unrealised profit]

Stock Reserve a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Stock on Consignment a/c	4,000	By Consignment a/c	4,000
	4,000		4,000

This would close the stock reserve account.

Stock on Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignment a/c	40,000	By Stock Reserve a/c By Balance c/d	4,000 36,000
	40,000		40,000
To Balance b/d	36,000

Balance Sheet

Liabilities	Amount (value)	Assets	Amount (value)
		Stock on Consignment	36,000

With respect to the information in the balance sheet, this would be the same as recording the stock on consignment at cost.

In problem solving and some times in manual accounting, stock reserve is shown as a deduction from the Stock on Consignment on the assets side of the balance sheet, thereby providing the information relating to both the invoice value and cost value of the stock on consignment.

Balance Sheet

Liabilities	Amount (value)	Amount (value)	Assets	Amount (value)	Amount (value)
			Stock on Consignment (−) Stock Reserve	40,000 4,000	36,000

Beginning of the subsequent accounting period

At the beginning of the subsequent accounting period, the values of Stock on Consignment and the Stock Reserve are brought into books through the opening entry.

Buildings a/c – Stock on Consignment a/c – Cash a/c To Capital a/c To – To Loans a/c To – To Stock Reserve a/c To Creditors a/c

Dr Dr Dr Dr Dr

– – 40,000 – –

– – – – 4,000 –

Stock on Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Balance b/d	40,000

Stock Reserve a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Balance b/d	4,000

The Consignment a/c at the beginning of the accounting period, is charged with the cost value of the opening stock of goods with the consignee, by transferring the opening balance in the Stock on Consignment a/c and the Stock Reserve a/c to it.

Consignment a/c To Stock on Consignment a/c	Dr	40,000	40,000
Stock Reserve a/c To Consignment a/c	Dr	4,000	4,000

Stock on Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Balance b/d	40,000	By Consignment a/c	40,000

Stock Reserve a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignment a/c	4,000	By Balance b/d	4,000

Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Stock on Consignment a/c	4,000	By Stock Reserve a/c	4,000

A statement in the following format for valuation of stocks and losses would be useful.

Statement for Valuation of Stocks and Losses

Particulars	Amount (value)	Quantity (units)	Cost		Loading		Invoice
			Rate (val/unit)	Amount (value)	Rate (val/unit)	Amount (value)	Rate (val/unit)	Amount (value)
Goods Consigned (+) Consignor Direct Expenses Freight Loading Charges	8,000 3,000	1,100 —	50 10	55,000 11,000	12.50	13,750		68,750
(−) Loss-in-Transit (Normal) (*a)		1,100 10	60 1	66,000 10
(−) Loss in Transit (Abnormal)		1,090 40	60.54 60.54	65,990 2,421
(−) Stock in Transit		1,050 50	60.54 60.54	63,569 3,027
(+) Consignee Direct Expenses *1 on all stock transported	3,000 2,000	1,000 —	60.54 5	60,540 5,000
(−) Loss in Transit (Abnormal)		1,000 40	65.54 65.54	65,540 2,622
Good Stock (+) Consignee Direct Expenses *2 on good stock received	1,200 2,000	960	65.54 3.33	62,918 3,200
(−) Loss in Storage (Normal)		960 20	68.87 0	66,118 0
Net stock received (+) Opening Stock (with the Consignee)		940 80	70.34 68.20	66,118 5,456	12	960		6,416
Total Stock		1,020	70.17	71,574
Returned Sold Loss in Storage (Abnormal) Unsold		20 880 25 95	50 70.17 70.17	1,000 1,755 6,666	12.50 12	250 1,140		1,250 7,804

Note

• Use

  Value

  Quantity

  to ascertaining rate after deducting normal loss .
• The expenses incurred by the consignee, that are treated as direct expenses, may be of two kinds.

  Expenses *1 which have to be paid for all the goods being transported

  Expenses *2 which have to be paid only for the good stock being unloaded, leaving aside the stock that is damaged in transit. This would be the case where the goods are so damaged that it would be beneficial to throw them away instead of taking delivery and paying the expenses.

• This statement which follows the physical flow of stock, can be used in almost all cases. Ignore the rows which are not relevant to the situation and work out the statement to obtain all the needed information.
• Loading and Invoice columns need be filled only for the ones needed and the rate column may be filled only where it helps calculate the values.
• Returned goods are valued at the consigned cost and not at the value arrived at by adding up direct expenses.

The consignee does not record any transaction relating to the value of goods received, returned, or lost.

Thus invoice pricing is an idea that he is not concerned with and does not affect his books of accounts.