Such pro-forma invoice is issued by the consignor to consignee regarding the goods before the sale actually takes place. Depending upon the arrangement with the consignee, the consignor may pay a commission to the consignee for making the sale. Due to increasing size of market, it is quite obvious that manufacturers or whole sellers cannot approach directly to every customer around the state or nation. To overcome this limitation, manufacturers normally appoint reliable agents at every desired location to reach the customers directly.
- Due to increasing size of market, it is quite obvious that manufacturers or whole sellers cannot approach directly to every customer around the state or nation.
- From the consignee’s perspective, there is no need to record the consigned inventory, since it is owned by the consignor.
- From the consignee’s perspective, a sale transaction triggers a payment to the consignor for the consigned goods that were sold.
- Online auction sites are a form of consignment arrangement, since a third party is undertaking the sales role.
- Expenses, which increases the cost of the goods and are of non-recurring nature and incurred till the goods reach the warehouse of consignee may called direct expenses.
- There will also be a sale transaction to record the sale of goods to the third party, which is a debit to cash or accounts receivable and a credit to sales.
He makes an agreement with local traders who can sell goods on his behalf on commission basis. Note − The goods sent on consignment account will be closed by transferring balance into the Purchase account or the Trading account. Consignment is a process under which the owner consigns/handovers his materials to his agent/salesman for the purpose of shipping, transfer, sale etc. Online auction sites are a form of consignment arrangement, since a third party is undertaking the sales role. (b) If Insurance premium is paid by the consignee, then consignee’s A/c will be credited.
Indirect Expenses
A del credere commission is paid by the consignor to his agent for taking additional risk of recovery of debts from the consignee on an account of credit sales made by him (agent) on consignor’s behalf. From the perspective of a consignor, the disadvantages of a consignment arrangement are that it is not paid up front for its inventory, and it must pay a commission to the consignee. From the consignee’s perspective, there is no need to record the consigned inventory, since it is owned by the consignor. It may be useful to keep a separate record of all consigned inventory, for reconciliation and insurance purposes. Invoice implies that the sale has taken place, but pro-forma invoice is not an invoice. Proforma invoice is a statement prepared by the consignor of goods showing quantity, quality, and price of the goods.
From the consignee’s perspective, a sale transaction triggers a payment to the consignor for the consigned goods that were sold. There will also be a sale transaction to record the sale of goods to the third party, which is a debit to cash or accounts receivable and a credit to sales. Normal Loss − Normal loss may occur due to inherent characteristics of goods like evaporation, drying up of goods, etc. It is not separately shown in the consignment account, but included in the cost of goods sold and the closing stock by inflating the rate per unit. Here, proportionate direct expenses mean — all expenses incurred by the consignor and the expenses of consignee, which are incurred by him till the goods reach the warehouse.
Commission
A consignment occurs when the owner of goods leaves them with another party to be sold. When the goods are eventually sold, the consignee retains a commission and pays the consignor the residual amount. If the goods are not sold, then the consignee eventually returns them to the consignor. If the unsold goods are perishable, the consignor might instruct the consignee to throw them away, rather than returning them. These arrangements minimize the amount of inventory that a consignee must retain on the premises.
From the perspective of a consignor, the advantages of a consignment arrangement are that it does not have to deal with the end customer, which means that it does not have to set up a storefront. Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee), who undertakes to sell the goods. The consignor continues to own the goods until they are sold, so the goods appear as inventory in the accounting records of the consignor, not the consignee. Warehouse rent, storage charges, advertisement expenses, salaries, etc. comes under the category of the indirect expenses. The distinctions between direct and indirect expenses are important especially at the time of valuation of the unsold closing stock. Expenses, which increases the cost of the goods and are of non-recurring nature and incurred till the goods reach the warehouse of consignee may called direct expenses.
Summary of Accounting Entries
Valuation of closing stock is done on the same basis as explained earlier i.e. proportionate cost + proportionate direct expenses. When the consignee eventually sells the consigned goods, it pays the consignor a prearranged sale amount. The consignor records this prearranged amount with a debit to cash and a credit to sales.
- Proforma invoice is a statement prepared by the consignor of goods showing quantity, quality, and price of the goods.
- Depending upon the arrangement with the consignee, the consignor may pay a commission to the consignee for making the sale.
- It may be useful to keep a separate record of all consigned inventory, for reconciliation and insurance purposes.
It also purges the related amount of inventory from its records with a debit to cost of goods sold and a credit to inventory. In a consignment arrangement, the consignor continues to own the goods until they are sold, so the goods appear as inventory in the accounting records of the consignor, not the consignee. When the consignee makes a sale, it records an increase in cash (from the customer’s payment), commission income for itself, and a liability for the residual amount of the sale, which it must forward to the consignor. When the consignor receives this payment from the consignee, it records the cash as revenue.
