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Valuation of Closing/Unsold Stock in Consignment:

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Learning objectives of this article:
  • Define and explain unsold stock or closing stock on consignment.
  • How is it calculated?

Definition and Explanation:

When all the goods sent on consignment have not been sold by the consignee at the time of preparing final accounts by the consignor the unsold stock is brought into books by means of the following journal entry:

Consignment stock account Dr.
          Consignment account Cr.

The consignment stock account is an asset and will be shown in the balance sheet. Next year it will be transferred to the debit side of the consignment account. The principle of valuing stock "cost price or market price whichever is lower" applies to consignment also. Cost price means original cost of the unsold stock plus proportionate amount of the expenses which are necessary to put the goods. In their present value place and condition such as freight, octroi duty, insurance, forwarding charges, carriage up to consignee's godown etc. Generally all expenses incurred till the goods reach consignee's godown etc. Generally all expenses incurred till the goods reach consignee's godown etc are treated as part of the cost whether incurred by the consignee or consignor. Expenses incurred in storage and selling the goods after the goods reach consignee's godown are not to be considered in the cost of the unsold stock (closing stock).

Example:

S & Co. of Chicago consigned 500 units of goods to R & Co. of New York, the cost price of units is $8000. S & Co paid the following expenses:

(a) Carriage $2,400
(b) Marine insurance $960
(c) Freight $1,080

R & Co. paid the following expenses:

(a) Dock charges to consignee's warehouse $150
(b) Import duty $450
(c) Carriage to the buyer's warehouse $500
(d) Commission $160
(e) Expenses on goods sold $100
(f) Warehouse rent $50

Out of 500 units 400 units were sold up to date. Find out the value of the closing stock on consignment.

Solution:

Total expenses incurred by consignor: (2,400 + 960 + 1,080) $4,440
Expenses incurred by consignee till the goods reach godown: (150 + 450) $600
 
  $5,040
 

Unsold units: 100

Cost of unsold units: (100 8,000)/500 = $1,600

Expenses to be included: (100 5,040 )/500 = $1,008

Value of unsold stock: $1,600 + $1,008 = $2,608

The following expenses have been ignored in the calculation of the value of unsold stock because these expenses have been incurred after the goods have been reached to consignee's godown:

Carriage to the buyers warehouse, commission, expenses on goods sold and warehouse rent.

 

Note:
Where details regarding the nature of expenses is not given in the question, the expenses incurred by the consignor will be taken into account for the valuation of closing stock. Expenses incurred by the consignee will be ignored.

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More study material from this topic:

Account Sales
Difference between consignment and sales
Journal entries in the books of consignor
Valuation of closing/unsold stock in consignment business
Invoicing goods at a price higher than cost price

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
----------------------------------------------------------------------------
  Variable Costing System
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  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
----------------------------------------------------------------------------
  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 

 

 
 

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