Accounting Heads in Consignee Books

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New Account Heads in Consignee Books

The account heads that are to be newly created in the books of the consignee are
  1. Consignor a/c – Personal Account
  2. Ordinary Commission a/c – Nominal Account
  3. Del Credere Commission a/c – Nominal Account
  4. Overriding Commission a/c – Nominal Account
  5. Special Commission a/c – Nominal Account
  6. Consignment Debtors a/c – Personal Account
  7. Consignment Expenses a/c – Nominal Account
  8. Consignment Bad Debts a/c – Nominal Account
  9. Consignment Income a/c – Nominal Account

1. Consignor a/c

  • Nature:

    Nominal Account
  • Purpose:

    To give the information relating to the amount due from or due to the consignor.

    The account heads are named after the consignors personal name or the consignors organisation name. [Eg: Robert a/c, M/s Innova Steel etc]. In cases where the goods are being received from more than one consignor, a separate account for each consignor is maintained with the relevant identification.

    Where the same person/organisation is consigning goods from different places, different accounts for different places may be maintained for the convenience of operation. In such cases, the name of the place (or any other relevant identification) would be indicated in brackets after the name of the consignor in the account heads. [Eg: M/s Innova Steels [Tenali]; M/s Innova Steels [Hyderabad]; etc.].

    Remember "The more information we need the more accounting heads we have to maintain".

Commission on Sales to Consignee

The commission receivable from the consignor for sales made on the consignment may take different forms depending on the agreement between them. The relationship between the Consignor and the Consignee is that of a principal and agent. The agreement between them guides the relationship. In deciding the method of calculating the commissions, we should go by the agreement between them.

However, there may be instances when we do not know about the agreement between them. In such situations and in all situations where there is nothing to understand things in the contrary, all commissions are calculated as a percentage of the gross sale proceeds made by the consignee.

In general practice we come across the following types of commissions:

  • Ordinary Commission
  • Del Credere Commission
  • Overriding Commission
  • Special Commission

2. Ordinary Commission a/c

  • Nature:

    Nominal Account
  • Purpose:

    To give the information relating to the amount of ordinary commission earned from sales made on consignment.

    This is the most common form of commission that we come across in consignment accounting. Where there is no other commission this is identified as "Commission a/c". Conventionally, this commission is calculated as a % of gross sale proceeds, where only the % of commission is given.

    Note that if there is a specific method mentioned for calculating commission, we should go by that method, even in case of ordinary commission. Where there is no specific method mentioned, then we calculate it as a % pf gross sale proceeds. There is no way we can calculate commission without the % of commission or some other method for calculating it being given. We cannot assume the % under any circumstance.

6. Consignment Debtors a/c

  • Nature:

    Personal Account
  • Purpose:

    To give the information relating to the amount due from the persons to whom the goods on consignment have been sold on credit.

    People who owe us money are our Debtors. In Consignment business, ownership of the goods involved in the business lies with the consignor.
    "accountancy,basic,financial,accounting,process"
    The sales are made by the consignee on behalf of the consignor. Therefore the people to whom the consignee sells the goods on credit would be due to the consignee. However, since the ownership of the goods lies with the consignor, they are effectively the consignor's debtors. If the consignor does not wish to maintain this information (since he does not deal wtih them directly) then the consignee account itself can be used in place of this account. Wherever a credit sale is made, the consignor would assume that the consignee should pay him instead of some third party.

    Since these debtors are related to the transactions involving sale of consignment goods, these dues cannot be clubbed with the amounts due from the other debtors related to the regular (trading) business. Therefore they are identified separately by prefixing the account with the word "Consignment" as "Consignment Debtors a/c".

    When the consignment debtors pay up, then the consignee becomes due to the consignor to the extent of the amount that is received from the consignment debtors.

    If the Consignment Debtors fail to pay up the loss would have to be borne by the consignor. However the loss is to be borne by the consignee if there is an agreement to that effect between the consignor and the consignee. Where the consignee is in receipt of "Del Credere Commission" we assume that the consignee has agreed to bear any loss on account of bad debts.

    Note:

    The "Consignment Debtors a/c" in the books of the Consignor and the Books of the Consignee are independent of each other. In the books of the Consignor they represent their own debtors and in the books of the consignee they represent some one else's debtors. Though they deal with the same class of persons, they are not the same. When dealing with consignor books consider yourself in the seat of the consignor and while dealing with consignee books consider yourself in the seat of the consignee for the purpose of thoght clarity.

3. Del Credere Commission a/c

  • Nature:

    Nominal Account
  • Purpose:

    To give the information relating to the amount of Del Credere commission earned on consignment.

    The ownership of the goods lies with the consignor. The risk in the business is completely borne by the consignor and at the same time the total returns belong to the consignor. The consignee also takes certain risks in terms of putting his efforts for sale, stocking the goods etc. If the goods are not sold, the consignor would be at greater loss compared to the consignee.

    The consignee may not be willing to sell the goods (received on consignment basis) on credit for the reason that he may have to be answerable for the collection of the dues relating to credit sales. The consignee would be selling the goods on credit (if so advised by the consignor) only if the risk of collecting the sale proceeds is not with him. If credit sales are made, the consignor cannot assume that the consignee has to give him the sale proceeds unless the consignee receives them from the consignment debtors. This results in the consignor having to take the total risk in the sale and also make the efforts to collect the sale proceeds.

    Since the customers to whom the consignee makes the sales are customers known to the consignee, it would be easier for him to pursue them for collecting the sale proceeds. Therefore to bind the consignee with the responsibility of collecting the sale proceeds relating to credit sales an additional commission known as "Del Credere Commission" is given by the consignor.

    Del Credere

    (Mercantile Law) An agreement by which an agent, when he sells goods on credit, engages, to insure, warrant, or guarantee to his principal the solvency of the purchaser, in consideration of an additional premium or commission (called a del credere commission). The engagement being to pay the debt himself if it is not punctually discharged by the buyer when it becomes due.

    When the consignee is in receipt of "del credere" commission, he is responsible for the collection of credit sale proceeds. Therefore if there is any bad debt in relation to the Consignment Debtors, the consignee would have to bear the loss. In the absence of any del credere commission being paid, the consignor has to bear this loss.

    Calculation

    The del credere commission when given as a % is calculated as a % of gross sale proceeds. Even here we should be aware, that the method of calculation is governed by the agreement between them. If there is a specific mention with regard to the method of calculating the commission, it should be followed. If no method is mentioned, then it is a convention that the del credere commission is calculated as a % of gross sale proceeds and not just the Credit Sale Proceeds.

4. Overriding Commission a/c

  • Nature:

    Nominal Account
  • Purpose:

    To give the information relating to the amount of overriding commission earned from sales made on consignment.

    Overriding Commission

    A commission paid to general agents or agency managers in addition to the commission paid to the soliciting agent or broker. [This term has its roots in insurance]

    In the process of making extra efforts for pushing through the sale of newly introduced products or slow moving products, the consignor may promise to give additional commission over and above the regular commission being paid. This is termed the "overriding commission". When given as a % and in the absence of any other agreement for the method of calculation this commission is also calculated as a % of gross sale proceeds.

5. Special Commission a/c

  • Nature:

    Nominal Account
  • Purpose:

    To give the information relating to the amount of special commission earned from sales made on consignment.

    As the name of the account signifies, this is an account which is used to record any other type of special commissions that the consignor may agree to pay the consignee. This would be based on the method agreed upon between the parties. If this is given as a % and no mention is made regarding the method of calculation this also should be calculated as a % of gross sale proceeds.

    There are a number of different ways we come across in problem solving. If you find them difficult, do not come to a conclusion that consignment accounting is difficult. The difficulty is with interpreting the method of calculating the commission and with the math part.

8. Consignment Bad Debts a/c

  • Nature:

    Nominal Account
  • Purpose:

    To give the information relating to the amount of loss on account of the "Consignment Debtors" not paying up.

    This account appears in the books of the consignee only when the consignee is responsible for collection of "Consignment Debtors" i.e. when he is in receipt of del credere commission. The consignee may have to bear the loss on account of "Consignment Bad Debts" even if he is not in receipt of del credere commission, if he has agreed so. This can be seen in the agreement between the consignor and consignee.

7. Consignment Expenses a/c

  • Nature:

    Nominal Account
  • Purpose:

    To give the information relating to the amount of expenses incurred in relation to the sale of goods consigned which have to be borne by the consignee.

    The consignee at the time of making the agreement with the consignor may agree to bear some of the expenses in relation to the sale of goods consigned. In such circumstances, the expenses are recorded in this account separately which would enable him to assess the profitability of his taking up the task of selling consigned goods.

    These are expenses for which there is no reimbursement from the consignor.

9. Consignment Income a/c

  • Nature:

    Nominal Account
  • Purpose:

    To give the information relating to the amount of net gain in relation to the sale of goods consigned.

    The consignee who has incomes in the form of various commissions, expenses/losses in the form of consignment expenses, consignment bad debts would be able to find the net income from the activity of acting as a consignee by transferring all his incomes/gains and expenses/losses in relation to this activity to this account.

    This account is a consolidation of all the nominal accounts in relation to the activitiy of making consignment sales and it gives the information relating to the amount of net gain/loss from such activity.

Only a Single "Commission a/c" in place of all Commission a/c's

We know that "The basic purpose of accounting is derivation of information" and "the more the information we need the more accounting heads we have to maintain". If the consignee does not need all the information relating to the various commissions separately, it would be convenient for him to use a single account by name "Commission a/c" in place of all the various commission a/c's. This needs all the commissions to be credited to the same account irrespective of the nature of the commission.

Calculating Net Income from del credere operations

The consignee gets Del Credere commission for taking the responsibility of collecting the credit sale proceeds from consignment debtors. If there is any bad debt on account of the consignment debtors not paying up, the consignee would have to bear the loss where he is in receipt of delcredere commission.

In cases where there is del credere commission income to the consignee and also loss on account of bad debts from consignment debtors, it would be helpful for him to find out if he is benefiting or losing on accepting Del Credere commission and taking up the responsibility of consignment bad debts.

This can be assessed by setting off the "Consignment Bad Debts a/c" and "Del Credere Commission a/c".

  • Set Off » Ledger Accounts

    Setting off Ledger accounts implies writing off the balance in one account with a balance of opposing nautre in some other account. Say, if the same person is both a debtor as well as a creditor for the organisation, his accounts as a debtor and as a creditor may be maintained separately in the books for the purpose of convenience. But at the end of the accounting period, while showing the balance of debtors and creditors in the Balance Sheet, prudence asks the accountant to set off these accounts and show only the account with an unset off balance in the balance sheet.

    When setting off accounts, assume that you are transferring the balance from the account with a lesser numerical balance (whatever the nature of the balance may be) to the account with a higher numerical balance.

    If the "Del Credere Commission a/c" has a greater balance, then transfer the balance in "Consignment Bad Debts a/c" to "Del Credere Commission a/c" or vice versa. The account with the greater balance will have the left over balance after set off. If the "Del Credere Commission a/c" is left with some balance, it implies there is some gain even after setting off the consignment bad debts. If the "Consignment Bad Debts a/c" has some balance left in it, then it implies that the commission earned is not enough to set off the loss.

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