Learning objectives of this article:
- Why goods are consigned on a price
higher than cost?
- What is account treatment when goods
are sent at a price that is higher than
the original cost of the goods?
Explanation:
Goods are normally sent on cost price to
the consignee but some time the consignor
makes the invoice at the selling price i.e.
proforma invoice price. The idea is that
consignee should not know the actual cost of
the goods. In such cases the entries are
made by the consignor in his books at the
invoice price. But for ascertaining profit
or loss on a consignment the sale proceeds
must be compared with the actual cost.
Therefore, every item appearing in
consignment account at invoice price must be
suitably adjusted so as to reduce it to the
cost price. This process of adjusting
invoice price to the cost price is termed as
"unloading". The following additional are
made in the books of the consignor to effect
unloading:
| (i) |
For unloading the difference between
invoice price and cost price on the
goods sent on consignment: |
| |
Goods
sent on consignment A/C |
Dr. |
| |
Consignment A/C |
Cr. |
| (ii) |
For unloading the excess value
put on the closing stock: |
| |
Consignment A/C |
Dr. |
| |
Stock reserve A/C |
Cr. |
The effect of the first entry is to
reduce the balance on "goods sent on
consignment account" to the cost price. As
usual it will be transferred to the trading
account.
The effect of the second entry is to show
"stock on consignment" in the balance sheet
as follows:
|
Balance Sheet
(asset side) |
| Consignment stock |
xxxxx |
|
| Less stock reserve |
xxxxx |
xxxxx |
| |
|
|
The consignment stock account and the
consignment stock reserve account will be
taken to the next year's books and then
transferred to the consignment account.
Example:
On 1st January 2010, Z & Co. of New
York
consigned 100 cases of dry milk to T & Co.
of Chicago. The goods were charged at a
Performa invoice value of $10,000 including
a profit of 25% on cost. On the
same date the consignor paid $600 for
freight and insurance. On 1st July, the
consignee paid clearing charges $1,000,
carriage $200. On 1st August consignee sold
80 cases for $10,500 and sent a remittance
for the balance due to the consignor after
deducting commission at the rate of 5% on
gross sale proceeds. Required: prepare
consignment account and T & Co. account in
the books of Z & Co.
Solution:
Consignment Account
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
2010 |
|
|
2010 |
|
|
|
Jan.1 |
Goods sent on consignment A/C |
10,000 |
Jan.1 |
Goods sent on consignment A/C |
2,500 |
| |
Bank A/C (freight and insurance) |
600 |
Aug.1 |
T & Co. (sales) |
10,500 |
|
July.1 |
T & Co. |
|
|
Stock on consignment |
2,360 |
| |
Clearing charges 1000 |
|
|
|
|
| |
Carriage
200 |
|
|
|
|
| |
Commission
525
|
1,725 |
|
|
|
| |
|
|
|
|
|
| |
Stock reserve A/C |
500 |
|
|
|
| |
Profit trf. to General P&L A/C |
2,535 |
|
|
|
| |
|
|
|
|
|
| |
|
15,360 |
|
|
15,360 |
| |
|
|
|
|
|
| |
|
|
|
|
|
T & Co. Account
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
2010 |
|
|
2010 |
|
|
| Aug.1 |
Consignment to Chicago A/C - sales |
10,500 |
July.1 |
Consignment to Chicago A/C - exp. &
commission |
1,725 |
| |
|
|
Aug.1 |
Bank A/C - final payment |
|
| |
|
|
|
|
8,775 |
| |
|
|
|
|
|
| |
|
10,500 |
|
|
10,500 |
| |
|
|
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
Working Notes:
| (i) |
Loading on goods sent on
consignment 25% on $10,000. |
2,500 |
| (ii) |
Loading on closing stock 25% on
$2,000. |
500 |
| (iii) |
Direct expenses included in
valuation of closing stock 1/5 of
$1,800 |
360 |
|
