Consignment

 When goods are sent by a manufacturer or a trader to an agent to be sold by him on a commission basis and at the risk and account of the former, they are said to be sent on consignment. In other words, a producer trader forwards his products to his selling agents, appointed at different places, to sell them on his behalf for an agreed commission.

The process of sending goods on this basis by one firm  to another  for sale is known as 'Consignment' and this transaction is called a 'Consignment Transaction'.

The consignment ' is 'Outward Consignment' for the person who sends the goods and an 'Inward Consignment' for the person who receives the goods for sale.

There are two parties involved:

1. the person who sends the goods - Consignor
2.  the person to whom the goods are sent. -  Consignee

The person who sends the goods to the agent is called the consignor and the person to whom the goods are sent for sale is called the consignee.

If 'X' sends goods to 'Y' for sale, 'X' is known as consignor and 'Y' consignee. The Consignor is the 'principal' and the consignee is the 'agent'. Their mutual relations are governed by the Law of Agency and, of course, by the terms of the contract between themselves. The consignee is a special kind of agent who has the goods. He passes the title of the goods to those who buy from him even if he sells the goods in contravention to the principal's instructions. Suppose, the consignor instructs the consignee not to sell the goods below a certain price. If the consignee sells the goods below the stipulated price, the buyer will have a good title to the goods. The consignor may, of course, ask the consignee to pay damages for breaking the terms of the contract with him. Like all agents, the consignee must render true accounts to the consignor, be faithful to him, and act according to his instructions.

He is entitled to remuneration and reimbursement of expenses incurred by him on behalf of the consignor.

The remuneration paid to the consignee is-

• Brokerage
• Commission
• Salary
• Surplus

Features of Consignment

 Goods are forwarded by the consignor to the consignee with an objective of sale at a profit.

 Under the consignment, goods are to be treated as the property of the consignor and to be sold as his risk entirely.

 The consignee does not buy the goods, he merely undertakes to sell them on behalf of the consignor. He is not responsible for any loss or even for any  destructions or damages to the goods. But the consignee should not show any negligence.

The consignor does not sell the goods to the consignee. Therefore, he cannot ask the consignee to pay the price of the goods unless those are sold and the sale proceeds are actually realised.

The consignee agrees to sell the goods for an agreed rate of commission and is allowed to deduct his commission due from the sale proceeds.

The agent enters into the picture only when he sells the goods and realises the amount.  He becomes indebted for amounts realised on behalf of the principal.

The relationship between the consignor and the consignee is that of a principal and an agent. As it is not a sale, whatever the consignee does is on behalf of the consignor and, therefore, all legitimate expenses incurred by the consignee for receiving and selling the goods should be reimbursed.

 Any stock remaining unsold with the consignee belongs to the consignor.  As the consignee acts on behalf of the consignor, the profit or loss on the sale of goods sent on consignment belongs to the consignor.

Important Terms in Consignment

There are a few terms relating to consignment which are commonly used. These are Performa invoice, account sales, non-recurring and recurring expenses, commission, advance, etc. These are explained as follows:

 Performa Invoice :

 Since the goods sent on consignment cannot be treated as sales, the consignor does not prepare a proper invoice. He simply prepares a Performa Invoice and sends it to the consignee, along with the goods dispatched. This is prepared with a view to informing the consignee about the price of goods, expenses incurred, mode of transportation, and the minimum sale price at which the goods are to be sold.

Account Sales :

As the consignee is an agent and is selling the goods on behalf of the consignor, he has to furnish the details of sale proceeds, expenses, commission, etc. to the consignor. He furnishes all these details through a statement called 'Account Sales'. This shows the quantity and description of goods sold, sale proceeds realised, the expenses incurred by the consignee, commission due to him, and the balance amount payable by him to the consignor. While preparing an Account Sales the consignee will deduct all expenses incurred by him concerning the consignment and the commission due to him. The remittances made in advance, if any, are also to be deducted from the balance so obtained. The consignee will send a bank draft or his acceptance for the balance due to the consignor

Commission :

It is the remuneration paid to the consignee by the consignor in consideration of the services rendered by the former in selling the goods consigned.

This commission can  be divided into two types

(a) Ordinary Commission, and

 (b) Special Commission.

a) Ordinary Commission :

 It is a commission usually paid as a fixed percentage on gross sale proceeds. The terms commission normally denotes ordinary commission, unless specified otherwise. The consignee is not responsible for any bad debts and he does not guarantee the payment from all those who buy on credit so long as he is getting ordinary commission only.

 b) Special Commission :

 This is the commission that the consignee gets over and above the ordinary commission. It can be sub-divided into two categories viz.,

Over-riding Commission

This is an extra commission allowed over and above the normal commission and is generally offered when the agent is required to put in hard work either in introducing a new product in the market or where he is entrusted with the work of supervising the performance of other agents in a particular area. This commission is also given for sales at prices higher than the price fixed by the consignor.

 

 Del Credre Commission.

Usually, all the losses are borne by the consignor. Sometimes the consignor expects that the consignee should also be responsible for recovering the debts and bear the loss on account of bad debts if any. To compensate him for this responsibility, he is given some extra commission called the ‘Del Credre Commission'. Such commission is calculated on the total sales unless there is a special agreement to the effect that it is to be paid only on the number of credit sales. Payment of this commission imposes extra liability on the consignee and , induces him to deal prudently and cautiously.

Expenses :

 Expenses relating to the consignment of goods are divided into two categories

Non-recurring Expenses

All the expenses which are incurred for bringing goods to the godown of the consignee are non-recurring in nature. Such expenses are generally incurred on the consignment as a whole, The non-recurring expenses will be incurred partly by the consignor and partly by the consignee.

The consignor usually incurs expenses on sending the goods to the consignee such as packing, cartage, loading charges, insurance, freight, etc. The consignee usually incurs expenses on receiving the goods from the consignee such as dock dues, customs duty, clearing charges, octroi, etc

Recurring Expenses.

These expenses are incurred after the goods have reached the consignee's place or godown. They are recurring in nature because they may be incurred repeatedly by the consignor and the consignee. The examples of recurring expenses incurred  by the consignor are advertising, discount on hills, commission on a collection of cheques, travelling, expenses of salesmen,bad debts, etc.

The examples of recurring expenses incurred by the consignee are godown rent: godown insurance, sales promotion, etc

 

Consignment Account:

 It is prepared by the consignor showing all transactions relating , to a particular consignment.

The objective of this account is to-ascertain net profit & loss arising from each consignment.

 Once goods are consigned by the consignor, their cost is debited to the Consignment Account along with various expenses incurred by the consignor and the consignee in dealing with that particular consignment.

 The commission due to the consignee is also debited to the Consignment Account.

 

 When Del Credre's commission is not paid, the bad debts, if any, are also to be debited to this account. Once the goods reach the consignee some of these will be unsold and the rest sold either on cash or credit, Irrespective of the type of sale, the entire sale proceeds will be shown on the credit side of the Consignment Account.

Dr. Consignment Account                                                         Cr

	To Goads Sent on Consignment A/c To Cash A/c (Consignor's Expenses) To Consignee's A/c (Consignee's Expenses) To Consignee's A/c (Commission) To Consignee's A/c (Bad Debts if any) To Profit and Loss A/c (Profit transferred)			By Consignee's A/c (Cash and Credit sales). By Goods Sent on Consignment A/c (Goods returned by the Consignee) By Consignment Stock A/c (unsold Stock) By Profit & Loss ( Loss transferred)

• Goods Sent on Consignment Account:

This is a real account. It deals with the goods transferred from the consignor to the consignee and goods returned by the consignee to the consignor. All the goods consigned by the consignor will be credited to this account and the goods returned by the consignee are debited to this account. The balance represents the cost of goods with the consignee for sale and is transferred to the Trading Account.

Dr. Goods sent on Consignment Account                                                        Cr

Date	Particular	Amount	Date	Particular	Amount
	To Consignment A/c  (Goods consigned)  To Trading A/c (Balance transferred)			By Consignment A/c (Goods consigned)

 

Consignee's Account:

It is a personal account of the consignee. It is prepared for ascertaining the amount due from the consignee. The consignee's account is debited with all cash and credit sales affected by the consignee. The various expenses incurred by the consignee, the commission charged by him, as well as the-advance remitted by him, are credited to this account. This account usually shows a debit balance indicating the amount due from the consignee. At times it may show credit balance if the advance  given by the consignee is more than the sale affected by him. The balance revealed by this account is shown in the balance sheet of the consignor, debit balance on the assets side, and credit balance on the liabilities side unless the account is settled by the required remittance.

Dr. Consignee's Account                                                              Cr

Date	Particular	Amount	Date	Particular	Amount
	To Consignment A/c			By Cash/Bank/Bills (Cash and Credit Sales)  Receivable A/c (Advance) By Consignment A/c (Consignee's Expenses)  By Consignment A/c (Consignee's Commission) By Banks A/c or Balance c/d

 

Following expenses are usually added for the calculation of closing stock.

• Carriage and Freight .
• Loading Charges
• Customs Duty
• Clearing Charges
• Dock dues ,
• Carriage paid up to the godown
• Unloading Charges

 

Following are the expenses which are not considered for the calculation of closing stock

• Discount Bad Debts
• Insurance of the goods in the godown

• Selling and Distribution Expenses.

The loss may occur due to factors like evaporation, leakage, mishandling, etc., or due to some accident or theft. Such losses can be broadly divided into two types.

1. Normal Loss and
2. Abnormal Loss

Normal Loss

 It is a loss that is due to the inherent nature of the goods consigned. It may arise in the process of loading and unloading of goods, breaking of bulk pieces into smaller ones, weighing, or due to evaporation, processing, unloading , weighing coal, some part is bound to fall down in the powdered form

Normal loss is not shown separately in the books of accounts.

No separate entry is passed for the normal loss. The effect of this is reflected in the valuation of closing stock only.

 Total Cost of Goods Consigned x Unsold Units

                                           Remaining Units

Abnormal Loss

Abnormal loss is calculated in the same manner as the value of the closing stock. In other words in order to calculate the abnormal loss all the proportionate non-recurring expenses ,incurred up to the point of loss are also added to the cost of abnormal loss units. The formula  for calculation of abnormal loss is as follows:

Cost of Abnormal Loss Units=  No. of Abnormal Loss Units x Cost Per Unit +

 Non-recurring expenses up to the point of loss x No. of Abnormal Loss Units

                                                                              No. of Units Consigned

Since the abnormal loss is not incidental to the consignment, it should be shown separately in the books of accounts. The total abnormal loss is credited to the Consignment Account.

Any amount received from the insurance company must be subtracted from the abnormal loss before it is transferred to the Profit and Loss Account.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JOINT VENTURE

When two or more persons join together to carry out a specific business venture and share the profits on an agreed basis it is called a 'joint venture'. Each one of them who joins as a party to the joint venture is called 'Co-venturer'. No Firm name is normally used for the joint venture business because its duration is limited to a short period. During this period, the co-venturers are free to carry on their own business as usual unless agreed otherwise. The business relationship amongst the co-venturer comes to an end as soon as the venture is completed. Thus, a joint venture is some kind of a temporary partnership between two or more persons who have agreed to jointly carry out a specific venture. Joint ventures are quite common in the construction business, consignment, sale, and purchase of property, underwriting of shares and debentures, etc.

ACCOUNTING TREATMENT

 

 Broadly speaking, accounts of a joint venture business can be kept in any one of the following four ways:

 

 1 In the books of one of the co-venturer:

 In case the business is not very large, only one of the venturers may be entrusted with the task of recording the transactions in his books. In that case, all other co-venturers will send their contributions to such venturer and he will open a Joint Venture Account and the personal accounts of other co-venturers in his books.

2 In the books of ail the co-venturers:

When all co-venturers are working actively, each one of them shall open a Joint Venture Account and the personal accounts of other Co-venturers in his books. In such a situation, each co-venturer informs others about the transactions undertaken by him so that they can incorporate them in their books.

3 Memorandum Joint Venture Account:

Sometimes each co-venturer records only such transactions as are directly concerned with him. In that case, he cannot work out the profit or loss because his books do not include all transactions of the joint venture. Hence, for calculating the profit or loss of the joint venture, a Memorandum Joint Venture Account has to be prepared by incorporating all transactions related to the joint venture. Thereafter the Joint Venture Account is completed and closed.

The method of preparing this account is very simple. It is prepared on the basis of information supplied by all the co-venturers. The debit entries appearing  in the personal accounts of all co-venturers are written on the debit side of the Memorandum Account and the entries appearing on the credit side of those accounts are shown on the credit side of the Memorandum Joint Venture Account. However, you should remember that the transactions which do not relate to an item of expense or income are to be excluded from this Memorandum Account. The difference in the totals of the debit side and the credit side represents profit or loss. The profit or loss thus calculated is then shared by the co-venturers in the agreed profit sharing ratio.

Interest in Joint Venture Transactions:

When the co-venturer invests money in a joint venture business and receives back the amounts on different dates, it is quite usual for them to agree to calculate interest at a certain rate. Each co-venturer is entitled to receive interest on the amounts invested by him and pay interest on the amounts received by him. Only the net interest receivable from, or payable to, the co-venturer is recorded in the Joint Venture Account. Thus, the net amount of interest is also taken into account before ascertaining the profit or loss on the joint venture.

A separate set of books

When a separate set of books are maintained, the joint venture transactions are recorded as a separate accounting entity on the basis of double-entry principles. Under this method the following accounts are opened:

1 Joint Bank Account

2 Joint Venture Account

3 Personal accounts of each co-venturer

Joint Bank Account is a real account like an ordinary bank account. All the co-venturers pay or deposit their contribution in this account, The Joint Venture Account is like a profit and loss account which shows all the expenses and incomes of the joint venture. The personal accounts of the co-venturers simply show their contributions

Underwriting of Shares:

Underwriting means agreeing to buy shares that are not subscribed to by the public. For this service, they receive some commission which may be paid partly in the form of shares of the company and partly in cash. The shares thus received are sold to the public or taken over by the co-venturers at an agreed price.