What is Consignment Account Preparation?

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Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

Consignment Account Preparation is the process of creating a special account to record all financial transactions related to goods sent by one person (the Consignor) to another (the Consignee) for sale on their behalf. It helps the Consignor track sales, expenses, and profits from these goods.

Simple Example

Quick Example

Imagine a textile shop owner in Surat (Consignor) sends a batch of fancy sarees to a smaller boutique owner in Pune (Consignee) to sell. The Pune shop owner sells the sarees and then sends money back to the Surat owner after deducting their commission and expenses. Preparing a Consignment Account is like keeping a detailed 'report card' for this entire saree selling activity.

Worked Example

Step-by-Step

Let's say a manufacturer, Mr. Sharma, sends 100 mobile phones to a dealer, Ms. Priya, on consignment. Each phone costs Rs. 8,000.

1. Mr. Sharma sends 100 phones @ Rs. 8,000 each. Total value = 100 * 8,000 = Rs. 8,00,000.
---2. Mr. Sharma pays packing and freight charges of Rs. 10,000.
---3. Ms. Priya sells 80 phones @ Rs. 10,000 each. Total sales = 80 * 10,000 = Rs. 8,00,000.
---4. Ms. Priya incurs godown rent and advertising expenses of Rs. 5,000.
---5. Ms. Priya is entitled to a 5% commission on sales. Commission = 5% of Rs. 8,00,000 = Rs. 40,000.
---6. To find the profit, we calculate:
Sales (Rs. 8,00,000) - Cost of phones sold (80 * 8,000 = Rs. 6,40,000) - Mr. Sharma's expenses (Rs. 10,000) - Ms. Priya's expenses (Rs. 5,000) - Ms. Priya's commission (Rs. 40,000).
---7. Profit = Rs. 8,00,000 - Rs. 6,40,000 - Rs. 10,000 - Rs. 5,000 - Rs. 40,000 = Rs. 1,05,000.

Answer: The profit on this consignment is Rs. 1,05,000.

Why It Matters

Understanding consignment accounts is crucial for anyone in business, helping them manage sales channels and partnerships effectively. This knowledge is vital in FinTech for tracking complex revenue streams and in Economics for analyzing distribution models, potentially leading to careers in supply chain management or financial analysis.

Common Mistakes

MISTAKE: Including the cost of unsold goods (closing stock) as an expense in the Consignment Account. | CORRECTION: The cost of closing stock is an asset, not an expense. It is shown on the credit side of the Consignment Account to balance it and then appears in the Balance Sheet.

MISTAKE: Treating all expenses incurred by the Consignee as chargeable to the Consignor, even if they are selling expenses after goods reach the Consignee's premises. | CORRECTION: Distinguish between 'direct' (non-recurring) expenses (like freight, insurance till godown) and 'indirect' (recurring) expenses (like godown rent, selling expenses). Only direct expenses are used to value closing stock.

MISTAKE: Calculating the Consignee's commission on the total value of goods sent, instead of only on the goods sold. | CORRECTION: Commission is always calculated on the actual sales made by the Consignee, unless otherwise specified in the agreement.

Practice Questions

Try It Yourself

QUESTION: Mr. Anil sent 50 cycles to Mr. Bhaskar on consignment. Each cycle cost Rs. 4,000. Mr. Anil paid Rs. 5,000 for freight. Mr. Bhaskar sold 40 cycles for Rs. 5,500 each. Calculate the total sales value. | ANSWER: Total sales value = 40 cycles * Rs. 5,500/cycle = Rs. 2,20,000.

QUESTION: Using the data from Q1, if Mr. Bhaskar incurred Rs. 2,000 for godown rent and is entitled to 5% commission on sales, calculate the amount Mr. Bhaskar needs to remit (send) to Mr. Anil after deducting his expenses and commission. | ANSWER: Total sales = Rs. 2,20,000. Consignee's expenses = Rs. 2,000. Commission = 5% of Rs. 2,20,000 = Rs. 11,000. Amount to remit = Sales - Expenses - Commission = Rs. 2,20,000 - Rs. 2,000 - Rs. 11,000 = Rs. 2,07,000.

QUESTION: A manufacturer in Delhi sent 200 LED TVs to a dealer in Kolkata. Each TV cost Rs. 15,000. The manufacturer paid Rs. 10,000 for transport. The dealer sold 150 TVs for Rs. 20,000 each. The dealer paid Rs. 5,000 for unloading and Rs. 3,000 for advertising. The dealer gets 6% commission on sales. Calculate the profit or loss on this consignment. (Hint: Value of closing stock needs to be calculated first). | ANSWER: 1. Cost of goods sent = 200 * 15,000 = Rs. 30,00,000. 2. Manufacturer's expenses = Rs. 10,000. 3. Dealer's direct expenses (unloading) = Rs. 5,000. 4. Sales = 150 * 20,000 = Rs. 30,00,000. 5. Dealer's commission = 6% of 30,00,000 = Rs. 1,80,000. 6. Dealer's indirect expenses (advertising) = Rs. 3,000. 7. Value of closing stock (50 TVs): Cost = 50 * 15,000 = Rs. 7,50,000. Proportionate manufacturer's expenses = (10,000/200) * 50 = Rs. 2,500. Proportionate dealer's direct expenses = (5,000/200) * 50 = Rs. 1,250. Total closing stock value = Rs. 7,50,000 + Rs. 2,500 + Rs. 1,250 = Rs. 7,53,750. 8. Profit = Sales + Closing Stock - (Cost of Goods Sent + Manufacturer's Expenses + Dealer's Expenses + Commission) = Rs. 30,00,000 + Rs. 7,53,750 - (Rs. 30,00,000 + Rs. 10,000 + Rs. 5,000 + Rs. 3,000 + Rs. 1,80,000) = Rs. 37,53,750 - Rs. 31,98,000 = Rs. 5,55,750. Profit = Rs. 5,55,750.

MCQ

Quick Quiz

Which of the following is NOT typically debited to the Consignment Account?

Cost of goods sent on consignment

Expenses incurred by the Consignor

Commission payable to the Consignee

Advance received from the Consignee

The Correct Answer Is:

An advance received from the Consignee is a liability for the Consignor, not an expense or cost related to the consignment itself. It is usually recorded in the Consignee's personal account.

Real World Connection

In the Real World

Many Indian businesses, from handicraft sellers in Rajasthan sending products to city showrooms, to agricultural producers distributing their harvest through agents, use consignment. E-commerce platforms sometimes operate on a consignment-like model where sellers list products, and the platform takes a commission on successful sales, managing delivery and payments.

Key Vocabulary

Key Terms

CONSIGNOR: The person who sends goods for sale | CONSIGNEE: The person who receives goods to sell on behalf of the Consignor | COMMISSION: The fee paid to the Consignee for selling the goods | PROFORMA INVOICE: A document similar to an invoice, sent by the Consignor to the Consignee, but not a demand for payment | DEL CREDERE COMMISSION: An extra commission paid to the Consignee for bearing the risk of bad debts (if customers don't pay)

What's Next

What to Learn Next

Next, you should explore 'Joint Venture Accounts'. While similar, joint ventures involve partners sharing both profits and risks, building on your understanding of how businesses collaborate and account for shared activities.