A transaction between a person (called consignor) and another person (called consignee)
Consignor sends goods to consignee to be sold for a mutually agreed commission.
The basic relationship between the consignor and consignee is that of a principal and agent.
Basic terms used in consignment-Meaning
Goods sent for sale on behalf and risk of the sender is called consignment.
The sender will open a separate consignment account is prefixed with name of the place where the goods are sent.
For example, if goods are sent to Assam for sale on consignment, them the name of account is “Assam Consignment Account”. It is a nominal account and all expenses incurred will be debited to it and sales made by agent i.e., consignee are credited to it.
The manufacturer or wholesale dealer who sends the goods for sale on his behalf is called ‘çonsignor’.
He is the owner of such goods and bears all the risks.
The person or the dealer to whom goods are sent for sale on behalf of the consignor is called consignee.
He is the agent of the consignor, aand will receive commission on the sales made by him.
In consignment transactions, the consignor sends goods to the consignee and makes a bill called ‘Proforma invoice’.
Which is purely a memorandum record for the reference of the consignor and consignee and contains information about the description of the goods consigned, their quantity, cost etc.
It may also contain the information about the minimum price at which goods may be sold by the consignee as well as any other special instruction.
The value recorded in proforma invoice may be the actual cost to the consignor or actual cost to the consignor plus mark-up (more popularly called invoice price) .
The consignee receives the goods and incurs expenses to take the delivery.
Normally consignee gives an advance to the consignor on receipt of the consignment.
The consignee does not incur any liability towards consignor by merely receiving the goods. The liability is incurred when he sells goods to the buyers.
Expenses on Consignment :
The expenses on consignment maybe incurred by consignor himself or by the consignee on behalf of the consignor.
All expenses incurred for the consignment are to be debited to the consignment account.
These expenses may be broadly divided into two types : i.e., Non-recurring expenses and Recurring expenses and Recurring expenses.
These expenses are incurred for bringing the goods to the place of the consignee.
These expenses are added to the original price of the goods consigned in order to calculate the actual cost of the goods at the point sales.
The non-recurring expenses maybe incurred by the consignor and the consignee. In other words, these expenses are incurred to bring the goods up to the godown of the consignee.
Non-recurring expenses incurred by consignor are packing and loading charges, carriage and cartage, dock dues, freight, insurance in-transit, etc.
The non-recurring expenses incurred by the consignee are :- unloading charges, dock charges, at port of destination, custom duty or import duty, octroi duty, loading and unloading expenses, carriage inward, etc.
These expenses are incurred after the goods reach the godown of the consignee.
These expenses are usually incurred for selling the goods. Recurring expenses incurred consignor may include discount charges of the bill receivable received from consignee and expenses incurred on damaged good returned by consignee.
Recurring expenses incurred by consignee include godown charges, advertisement :- expenses on goods returned : – fire insurance premium : salary of selling staff, brokerage , the commission payable to consignee is also recurring expenses.
Expenses incurred by consignee but are not reimbursable
There may be some expenses incurred by consignee which as per agreement, are not to be reimbursed to him by consignor.
Such expenses are not the expenses of consignor, therefore, these are not debited to consignment account.
Consignee will treat such expenses as his own expenses and shall record them in his books
The remuneration payable by consignor to consignee for making sale of goods is called commission.
The commission is an expense on the consignment and is debited to consignment account. The following are the various types of commission
(a) Ordinary commission : The ordinary commission or simple commission is calculated on the total sales made by consignee. The percentage of ordinary commission is given on total sales made by consignee.
(b) Special commission or over-riding commission : This commission is payable to consignee for encouraging him to sell the goods at a price higher than normal sales price or for promoting the sale maximum possible extent. The special commission can be calculated on total sale or surplus of sale price over minimum fixed selling price or on a given percentage as a share in net profits of the consignment. The terms and conditions for special commission are given in the question, the students are therefore advised to read them carefully.
(c) Del-Credere Commission
The del-credere commission is an additional commission given to consignee to bear the risk of bad debts arising out of credit sales.
This commission is calculated on Total Sales unless otherwise given in the questions.
In case of consignment the sales are made by consignee on behalf of and at the risk of the consignor.
In the absence of del-credere commission, the bad debts arising out of credit sales made by consignee will be the loss of the consignor.
In order to recover the gross sales proceeds from consignee, the consignor allows additional commission on total sales to consignee.
This additional commission is called del-credere commission and now the risk of bad debts is to be borne by the consignee.
The consignor will not be responsible for loss due to bad debts. The consignee will now be liable to pay the total amount of cash sale and credit sale to the consignor.