Expenses on Consignment Paid by the Consignor

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Assets » Direct Expenses

The term direct expense is related to assets. An expenditure which goes into the value of an asset is called "Direct Expenditure".
  • Asset Valuation Principle :

    The value of an asset includes all the expenses
    incurred before brining the asset into usable condition.

    This implies that all the expenses incurred in relation to an asset before bringing the asset into usable condition would form direct expenses for the asset and they are to be considered as a part of the value of the asset.

    If a machine is purchased at Delhi and brought to Tenali for use, then all the expenses incurred before brining the machine into working mode (usable condition) like transportation charges from Delhi to Tenali, Unloading Charges at Tenali, Installation Charges etc., should be considered to be part of the value of the machine. These expenses should not be debited to the respective expenditure accounts, but should be debited to the machinery account. The machinery account balance which indicates the value of the asset would be the sum of the cost of the machine, the transportation charges, unloading charges, installations charges, etc..

Is Stock an Asset??

Whenever we purchase stock/goods we debit the Purchases a/c (Nominal account). This implies that we treat the amount spent on purchasing stock as an expenditure. Such a treatment is adopted all throughout the yera.

However at the end of the accounting period, at the time of perparation of the final accounts we treat stock an asset and show it in the Balance Sheet as an asset. Therefore we can say that stock has dual nature. All throughout the year the amount spent on it is expenditure and only for the moment the balance sheet is prepared it is an asset. The account representing Stock as an asset (Closing Stock a/c) is created at the last moment of the accounting period, carried forward to the next period and written off at the first moment of the next accounting period. (This can be understood from the fact that the stock a/c balance at the beginning (opening stock) is transferred to the "Trading a/c")

  • Valuation of Stock (as an Asset) » Based on the same principle

    If stock is an asset, then its value should also be decided based on the principle for valuation of assets. The value includes all the expenses incurred before brining the asset into usable condition.
  • Usable Condition for Stock » Ready for Sale

    The stock being used for the purpose of sale, the usable condition for stock would mean getting it ready for sale i.e. when it is finally set up in the show case or sale area.

    Therefore all the expenses incurred on the stock till it is placed in the sales area would form direct expenses for the stock and should be treated as a part of the value of stock. In situations where it would be difficult/impossible to collect all the expenses in detail, this idea is modified to mean the expenses incurred before that stage till which point it would be convenient to collect information.

Direct Expenses for Stock used for Consignment

In relation to the consignment business, the asset we deal with is the stock being sent to the consignee. The usable condition for the stock would be it being placed ready for sale in the consignees showroom. ∴ the direct expenses in relation to this stock would be all the expenses incurred before placing it in consignee's show room ready for sale.
  • Expenses after unloading the Goods

    The goods would be unloaded at the consignee's godown, unpacked,
    sorted and placed in the showroom as and when needed. Till the time the goods are placed in the show room they lie in the godown. It would not be difficult to ascertain the cost that goes into the value of the stock till the goods are unloaded.

    Therefore in valuing stock used for consignment, it would be required to ascertain (in relation to a particular item of stock), proportionate unloading charges (when the charges are paid for many items together), proportionate cost of unpacking (the same workers may be unpacking many items), proportionate cost of sorting (the same workers may be sorting many items), proportionate cost of storing/rent (the godown may be stocking different types of goods) till the goods are taken to the showroom.

    However, it would be impractical to think of collecting the information in such detail. For this reason, the point where usability is decided is moved backwards and taken as till the goods reach the consignee's godown. Thus, in valuing the stock relating to consignment, we should be say that "the value of stock includes all the expenses incurred before the goods reach the consignee's godown".

    This is also interpreted in terms of direct expense as "All the expenses incurred before goods reach the consignee's godown are direct expenses for the goods".

  • Expenses incurred by the Consignor

    All the expenses incurred by the consignor are incurred before goods reach the consignee's godown and are therefore direct expenses.
  • Expenses incurred by the Consignee

    The expenses incurred by the consignee may be direct or indirect based on when they are incurred. If an expenditure incurred by the consignee is before the goods reach his godown i.e. before they are unloaded and kept in his godown, they are direct otherwise they are indirect.

The classification of the expenses as direct and indirect has a relevance only for the purpose of valuing closing stock in consignment. It has no relevance with regard to recording the consignment transactions relating to expenses. Whether direct or indirect an expenditure is an expenditure for the purpose of accounting.

Expenses paid at the place of the Consignor

M/s Innova Steels, Tenali may be required to spend some amount on expenses in relation to consignment. These expenses may be paid in cash, through a cheque or may be outstanding.

02. June 15th: For the expenses incurred by the consignor and
      (a) paid in cash Rs. 1,240
      (b) paid by cheque Rs. 3,000
      (c) outstanding Rs. 560.

Consignor's Books Hide/Show

Accounts Effected by the Transaction » Identification & Analysis:

  • Debit » Vijayawada Consignment a/c

    The expenses incurred for consignment would have to be debited to "Consignment a/c" as it is the only nominal account being maintained to record consignment expenses.
    [Consignment a/c – Nominal a/c – Debit all expenses and losses]
  • Credit »

    • Cash a/c

      When the expenses are paid in cash, "Cash a/c" is credited since cash is going out.
      [Cash a/c – Real a/c – Credit what goes out.]
    • Bank a/c

      When the expenses are paid by cheque, "Bank a/c" is credited since the bank gives the benefit.
      [Bank a/c – Personal a/c – Credit the benefit giver.]
    • Outstanding Expenses a/c

      When the expenses are still to be paid (outstanding), "Outstanding Expenses a/c" is credited.
      [Outstanding Expenses a/c – Personal a/c – Credit the benefit giver.]

      "Outstanding Expenses a/c" represent the amount that is to be paid on account of expenses unpaid. It is an equivalent of a liability. Since we could manage the expenditure without paying it, the person to whom the amount is outstanding stands in the position of the benefit giver. Though this also represents money owed to outsiders, we refrain from calling this creditors as creditors generally would mean persons/organisations to whom we owe on account of credit purchases.
      [Any nominal account prefixed or suffixed by the terms Outstanding, prepaid, still payable, still receivable etc., is a personal account and not a nominal account]

Remember that the Cash a/c, Bank a/c and the Outstanding Expenses a/c being used here are regular accounts which already exist in the accounting books of the consignor and they need not be created again for the purpose of consignment.

The effect of the transactions can be summarised as
2(a): (i) Vijayawada Consignment a/c and (ii) Cash a/c
2(b): (i) Vijayawada Consignment a/c and (ii) Bank a/c
2(c): (i) Vijayawada Consignment a/c and (ii) Outstanding Expenses a/c

DrVijayawada Consignment a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)


To GSC a/c (1)
To Cash a/c (2a)
To Bank a/c (2b)
To Out. Exp a/c (2c)



We avoid showing the postings in the regular accounts [Cash a/c, Bank a/c, Outstanding Expenses a/c] as they are not asked to be prepared generally in examination conditions. The reason being the information in those accounts would be only partly relevant to consignment. To draw up the complete account you may need other information unrelated to consignments.

Journal in the books of M/s __ for the period from ____ to _____
Date V/R
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
June 15th Dr
June 15th Dr
June 15th Dr

Consignee's Books Hide/Show

The ownership of the business is with the consignor. Consignee is no way connected to the expenses on consignment incurred by the consignor. Therefore he would not be required to incorporate this into his account books.

There is no entry for this in the books of the consignee

Author Credit : The Edifier ... Continued Page 8

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