The consignor, located at ITown, has entered into an agreement with a consignee, located at Metro, for sale of goods on consignment basis.

The consignor, periodically, consigns goods to the consignee for being sold on consignment basis.

Practically we do not come across the sentences that we write to represent transactions in the accounting books. What we find is proof of transactions in the form of vouchers, receipts, invoices etc., whose interpretation sounds like the sentence that we read. We use these sentences in the process of learning accounting. These sentences are used to form the narrations for the journal entries.

Example

Goods valued 2,00,000, have been consigned by the consignor to the consignee.

Consider an organisation where goods are purchased for being used in the activity of trading.

In a transaction of purchase of goods, the value of goods is debited to the Purchases a/c. At the end of the accounting period, the balance in Purchases a/c would be transferred to the Trading a/c.

This will result in debiting the Trading account with an expenditure equal to the balance in the Purchases a/c.

Assume that a part of the goods purchased for the purpose of trading is being sent on consignment.

The value of stock utilised for purposes other than trading, has to be credited to the Purchases a/c, so as to reduce the expenditure that is ultimately debited to the trading account.

This can be done

• As and when the transfer is made

  Say, 50,000 worth of goods have been purchased and 10,000 worth are being sent on consignment

  Consignment a/c To Purchases a/c	Dr	10,000	10,000
  Bank a/c To Purchases a/c	Dr	50,000	50,000

  Purchases a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Bank a/c	50,000	By Consignment a/c	10,000

  This amounts to transferring an expenditure of 10,000 from Purchases account to the Consignment account.

• At the end of the accounting period

  Say, purchases account has a balance of 52,00,000 and 2,00,000 worth of goods have been consigned over the accounting period.

  • Transfer from purchases a/c

    From the purchases account, the value of goods consigned would be transferred to the consignment account and the balance representing the expenditure for trading activity to the trading account.

    Trading a/c Consignment a/c To Purchases a/c

    Dr Dr

    50,00,000 2,00,000

    52,00,000

    Purchases a/c

    Dr Cr
    Particulars	Amount	Particulars	Amount
    		By Consignment a/c By Trading a/c	2,00,000 50,00,000

    This results in the Trading a/c being debited with an expenditure of 50,00,000 representing the value of goods utilised for Trading activity and the consignment account being debited with the relevant expenditure, 2,00,000.

  • Transfer from Trading a/c

    If the stock used for consignment has not been eliminated from the Purchases a/c before transferring its balance to the Trading a/c, it has to be eliminated from the the Trading a/c.

    Trading a/c To Purchases a/c	Dr	52,00,000	52,00,000
    Consignment a/c To Trading a/c	Dr	2,00,000	2,00,000

    Purchases a/c

    Dr Cr
    Particulars	Amount	Particulars	Amount
    		By Trading a/c	52,00,000

    Trading a/c

    Dr Cr
    Particulars	Amount	Particulars	Amount
    To Purchases a/c	52,00,000	By Consignment a/c	2,00,000

    This amounts to debiting the Trading a/c with an expenditure of 52,00,000 and then eliminating an expenditure of 2,00,000 by transfer to the consignment a/c.

    In manual accounting, this is sometimes shown as a deduction from Purchases a/c on the debit side.

    Crediting or Debiting a ledger account has the same affect as deducting an amount from any item on the opposing side of the account. Generally such deductions are shown as being made from a relevant item. Purchase returns from purchases, sales returns from sales etc.

• Using an intermediary account (Goods sent on consignment a/c)

  Where the transfer is recorded as and when it is made, by crediting purchases account, the purchases account balance indicates the value of goods utilised for trading purposes.

  However, if the organisation intends to know the value of goods consigned till that point of time, it has to derive that information manually, by adding up the amounts shown with the postings

  • To Purchases a/c in consignment a/c or
  • By Consignment a/c in purchases a/c.

  To be able to derive this information instantaneously an additional accounting head by name Goods Sent on Consignment a/c is used.

  All transfers are recorded as and when the transfer is made using this account in place of purchases a/c.

  The more the information we need, the more the accounting heads we need to maintain.

  Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Goods Sent on Consignment a/c	10,000

  The Goods sent on Consignment a/c shows a credit balance which represents the value of goods consigned during the accounting period till the time the balance is drawn.

  Goods sent on Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Consignment a/c By Consignment a/c By Consignment a/c	10,000 18,000 –

  The Goods sent on Consignment a/c is closed at the end of the accounting period by transfer to the Trading a/c.

  Goods sent on Consignment a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  To Trading a/c	2,00,000	By Consignment a/c By Consignment a/c	– –

  Trading a/c

  Dr Cr
  Particulars	Amount	Particulars	Amount
  		By Goods Sent on Consignment a/c	2,00,000

  This amounts to eliminating the value of goods consigned from the Trading a/c instead of from the Purchases a/c.

  Nature

  • The balance in the Goods sent on consignment a/c represents a reduction in expenditure which would be similar to a notional gain that would ultimately set off the expenditure on account of purchases.

    As such it is a nominal account and is closed at the end of the accounting period as all other nominal accounts.

  • Nominal accounts are closed at the end of the accounting period by transfer to either the Trading a/c or the Profit and Loss a/c as the case may be. All accounts whose postings appear in the Trading a/c or the Profit and Loss a/c are nominal account.

    Since Goods sent on consignment account is also closed by transfer to Trading a/c, it would be a nominal account.

To arrive at the journal entry to be recorded for an accounting transaction, we

• analyse the transaction,
• identify the two ledger accounts affected by the transaction,
• identify the nature or type of each of the accounts,
• apply the rules of debit and credit to each of the accounts, based on what happens in the transaction.

This helps us decide which of the accounts is to be debited and which credited.

Partial Analysis

After identifying the two ledger accounts affected by a transaction, we would be able to come up with an explanation relating to one of the accounts easily.

At times, the analysis becomes confounding, mostly with respect to one of the accounts affected by the transaction.

In such circumstances, we go by the logic that, of the two accounts affected by a transaction, when one account is debited, the other has to be credited or vice versa. We try to arrive at the journal entry for recording the transaction so as not to get bogged down at analysing the transaction.

Even in such an approach, it is imperative that we identify the two accounts affected by the transaction.

Example

For goods sent on consignment, we can conclude that Consignment a/c is to be debited since it is an expenditure in relation to consignment. Arriving at an explanation for the second account affected, the Goods sent on Consignment a/c is perplexing.

Dr/Cr - Transaction analysis

• Debit - Consignment a/c

  Nominal
  ↓
  Debit
  {all expenses & losses}

  Sending the goods on consignment amounts to the consignor incurring an expenditure in relation to consignment to the extent of the value of goods consigned.

  All expenses, losses, incomes and gains in relation to consignment have to be transferred(debited) to the Consignment a/c, which is used to derive the information relating to the profits or losses on consignment.

  There is no other ledger account for deriving information relating to expenses on consignment.

  Thus, the expenditure on account of goods sent on consignment is debited to the Consignment a/c.

• Credit - Goods sent on Consignment a/c

  Nominal
  ↓
  Credit
  {all incomes & gains}

  Goods sent on consignment represents expenditure to be deducted from purchases and transferred to consignment.

  A deduction or reduction in expenditure is an equivalent of an increase in income amounts to Balance of Goods sent on consignment a/c represents expenditure to be deducted from purchases expenditure relating to trading activity, which is done by crediting the trading account.

Journal

Ledger

The ownership of the goods is with the consignor. He takes all the risks and returns on consignment

This transaction, goods being sent on consignment, does not result in an expenditure or loss, a gain or income, an acquisition of an asset, or taking up a liability to the consignee. It does not affect the consignee in value terms.

Thus, the consignee does not record this transaction in his books of accounts.

Stock record

Consignee not recording the transaction in his books of accounts does not mean that the consignee will have no record whatsoever of the goods.

He does not record the transaction in his accounting books. He, however, should be maintaining a stock record, to enable deriving the information relating to the goods received, sold, returned, and otherwise disposed.