The account heads that are to be created in the books of the consignor are

a/c Head	Type
Consignor a/c	Personal
Ordinary Commission a/c	Nominal
Del Credere Commission a/c	Nominal
Overriding Commission a/c	Nominal
Special Commission a/c	Nominal
Consignment Debtors a/c	Personal
Consignment Expenses a/c	Nominal
Consignment Bad Debts a/c	Nominal
Consignment Income a/c	Nominal

Nature

Consignor a/c is a Nominal Account

Purpose

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

Explanation

The consignors personal or organisation name is used as the account head.

Eg: Robert a/c, M/s Innova Steel etc.

Where goods are being received from more than one consignor, a separate account for each consignor is maintained.

Where the same person or organisation is consigning goods from different places, different accounts for different places may be maintained to enable deriving the information for each place distinctly.

In such cases, the name of the place, or any other relevant identification, would be included along with the account heads.

Eg: M/s Innova Steels ITown; M/s Innova Steels BTown;

The relationship between the Consignor and the Consignee is that of a principal and an agent. Just like an agreement forming the basis for an agency, the agreement between the consignor and the consignee, in relation to the consignment business, guides their relationship.

The commission receivable from the consignor for sales made on the consignment may take different forms depending on the agreement between them and is calculated based on the agrement.

In problem solving, in the absence of information relating to the agreement between the consignor and the consignee, relating to commission, we follow general conventions.

In the absence of information to the contrary, all commissions are calculated as a percentage of gross sale proceeds.

Types of Commission

Following are the most common forms of commission in relation to a consignment business.

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

Nature

Ordinary Commission a/c is a Nominal Account

Purpose

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

Explanation

This is the most common form of commission that we come across in consignment accounting. The ledger account providing the information relating to ordinary commission is named Commission a/c where this is the only commission earned by the consignee on consignment sales.

Where there are other commissions, this account name is prefixed by Ordinary to differentiate it from the other ledger accounts providing information relating to the other commissions.

Calculating Commission

Conventionally, in the absence of information to the contrary, where only the % of commission is known, Ordinary commission is calculated as a % of gross sale proceeds. If there is a specific method mentioned for calculating ordinary commission, we should go by that method.

There is no way we can calculate commission without the % of commission or some other method for calculating it being given. We cannot assume % of commission under any circumstance.

Nature

Consignment Debtors a/c is a Personal Account.

Purpose

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

Explanation

People who owe money to the organisation are its Debtors.

In Consignment business, ownership of the goods involved in the business lies with the consignor. Sales on consignment are made by the consignee on behalf of the consignor. Therefore, eventhough people to whom the consignee sells the consigned goods on credit would be due to the consignee, they are effectively the consignor's debtors.

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 other businesses of the consignee.

Account Head

To identify these accounts distinctly, the word Consignment is prefixed to the Debtors a/c. When there are more than one consignors, these may be additionally prefixed with the name or place of the consignor like ABC Consignment Debtors a/c.

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

Bad Debts

If the Consignment Debtors fail to pay up, the loss on account of non payment (bad debts), would have to be borne by the consignor, in the absence of agreement to the contrary, since all the risks of the consignment are to be borne by him and the consignee is only his agent. 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, in the absence of information to the contrary, we assume that the consignee has agreed to bear any loss on account of bad debts.

Note

The consignor may be maintaining an account by the same name, Consignment Debtors a/c, in his books of accounts, for deriving the information relating to the credit sales made and the amounts collected and due from the ones to whom the consignee has made credit sales. The consignor may also choose to not maintain who 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.

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.

Nature

Del Credere Commission a/c is a Nominal Account

Purpose

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

Explanation

Sales on consignment are made by the consignee. With regards to credit sales, since the customers to whom the sales are made are known to the consignee, the consignee would have to pursue them for collecting the sale proceeds.

The consignee may not be willing to sell on credit, for the reason, that he may have to take the risk of pursuit for payment, even though he may not be be answerable for the non collection of the dues.

On the other hand, since the responsibility of loss on account of non payment does not lie with him, the consignee may make credit sales without caution. This may result in bad debt losses which have to be borne by the consignor. The consignor may also have to deal with payments uncollected for substantial period.

In such circumstances, the consignor would offer Del credere commission to the consignee, to motivate him to sell on credit and take up the responsibility of collecting the dues as well.

Del Credere

An Italian word

• Belief
• Trust

A del credere agent sells goods on behalf of the principal with an implied guarantee regarding the solvency of the buyer. This would put the agent in the position of a guarantor for the sale proceeds in case of insolvency of the buyer.

The agent would be liable to pay the debt if it is not discharged by the buyer when it becomes due. The agent however would not be liable if the buyer refuses to pay up on account of other reasons like a dispute regarding goods purchased.

In consignment business, the consignee would be a del credere agent, when he is in receipt of delcredere commission.

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 method of calculation of delcredere commission is dependent on the agreement between the consignor and the consignee.

In the absence of any information to the contrary, del credere commission when given as a % is calculated as a % of gross sale proceeds and not just credit sales.

Nature

Overriding Commission a/c is a Nominal Account

Purpose

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

Explanation

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.

Calculation

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.

Nature

Special Commission a/c is a Nominal Account

Purpose

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

Explanation

As the account name signifies, this is an account which is used to record any other commissions that the consignor may agree to pay the consignee.

Calculation

Calculation of this commission would be based on the method agreed upon between the parties. When given as a % and in the absence of information to the contrary, this would be calculated as a % of gross sale proceeds.

If the consignee does not need 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. In such a case, all commissions are credited to the same account.

Nature

Consignment Bad Debts a/c is a Nominal Account

Purpose

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

Explanation

The consignee may have to bear the loss on account of Consignment Bad Debts when he is in receipt of del credere commission. If the consignor and consignee agree to it, he may have to bear the loss even if he is not in receipt of del credere commission.

Th Consignment Bad Debts a/c appears in the books of accounts of the consignee, only in cases where he has to bear the loss on account of consignment debtors not paying up their dues.

Where the consignee is in receipt of del credere commission and incurs loss on account of consignment bad debts, it would be helpful for him to find out if he is benefiting or losing by accepting Del Credere commission and taking up the responsibility of consignment bad debts.

Net del credere commission can be assessed by setting off Consignment Bad Debts against Del Credere Commission.

Set Off

Set off implies combining two values of opposing nature.

We set off a debit balance against a credit balance. We set off a loss against a profit.

In a set off, the balance that remains, is the absolute difference of the two being set off. The nature of balance is that of the higher value.

If a debit balance of 12,000 and a credit balance of 5,000 are set off. There would be a net debit balance of 7,000.

When setting off ledger account balances, to derive the journal entry indicating the set off, we assume that we are transferring the balance from the account with a lesser balance (whatever the nature of the balance may be) to the account with a higher balance.

If Del Credere Commission a/c has a greater balance, we assume that we are transferring the balance in Consignment Bad Debts a/c to Del Credere Commission a/c or vice versa.

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.

Nature

Consignment Expenses a/c is a Nominal Account

Purpose

To provide 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.

Explanation

The consignee may agree to bear some of the expenses in relation to the sale of goods consigned.

In such circumstances, the expenses that are to be borne by the consignee are recorded through this account. This would help him in assessing the gain on taking up the task of selling consigned goods by setting off these expenses against the commission income.

Nature

Consignment Income a/c is a Nominal Account

Purpose

To provide the information relating to the amount of net gain to the consignee from sale of goods consigned.

Explanation

The consignee who has incomes in the form of various commissions, expenses in the form of consignment expenses, and losses in the form of 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.