Return of goods is something that is normal in business. Just like purchase returns and sale returns in relation to trading activity, there is a possibility of the stock being returned in a consignment business.

The consignee may find the need to return the goods received by him on account of the goods being defective, becoming unsaleable, becoming stale, the contract between the consignor and the consignee coming to an end, etc.

The transaction value of the goods being returned would be dependent on the cost of the goods consigned by the consignor.

Example

goods returned by the consignee 8,400

Dr/Cr - Transaction analysis

Whenever goods are sent on consignment to the consignee, the value of goods consigned is treated as an expenditure in relation to consignment and charged to the Consignment a/c by debiting it. The value of goods consigned during the current accounting period is accumulated as a credit balance in the Goods sent on Consignment a/c.

Since goods are being returned, an expenditure equal to the value of the goods returned should be eliminated from the consignment a/c and the value of goods consigned during the current accounting period should also be reduced by that amount.

• Debit - Goods sent on Consignment a/c

  Nominal
  ↓
  Debit
  {all expenses & losses}

  Goods sent on Consignment a/c carries a credit balance indicating the value of goods consigned during the accounting period.

  Goods sent on Consignment a/c is debited to deduct the value of goods returned.

• Credit - Consignment a/c

  Nominal
  ↓
  Credit
  {all incomes & gains}

  The charge on the consignment a/c is reduced by crediting the Consignment a/c.

  A reduction in expenditure is an equivalent of an increase in income.

Journal

Ledger

Should the value to be attributed, to the stock being returned be, its cost when it was consigned or should it be, the value based on the principles for valuation of assets? Should the value be ascertained like in the case of closing stock on consignment?

The transaction value for the goods being returned by the consignee to the consignor should be the cost at which they were consigned and not the value ascertained by adding up direct expenses relating to consigned goods.

Illustration

The consignor has consigned goods worth 10,000 to the consignee and has paid 1,000 on transportation.

Since the expenses are incurred by the consignor, they would be direct expenses.

These goods are being returned by the consignee in total and there are no other transactions.

The transactions to be recorded would be.

1. Goods consigned - 10,000
2. Expenses paid by the consignor - 1,000
3. Goods returned - ?

• Returns recorded at their value which includes direct expenses

  If the returns are recorded at their value i.e. 11,000.

  Goods sent on Consignment a/c To Consignment a/c	Dr	11,000	11,000
  [For the value of goods returned]

  Consignment a/c

  Dr Cr
  Date	Particulars	Amount	Date	Particulars	Amount
  15/06/_5 15/06/_5	To Goods sent on Consignment To Cash	10,000 1,000	18/06/_5	By Goods sent on Consignment	11,000
  		11,000			11,000

  Goods sent on Consignment a/c

  Dr Cr
  Date	Particulars	Amount	Date	Particulars	Amount
  18/06/_5	To Consignment	11,000	15/06/_5 30/06/_5	By Consignment By Balance c/d	10,000 1,000
  		11,000			11,000
  01/07/_5	To Balance b/d	1,000

  Expense charged to Trading a/c

  The net effect of these transactions would be a debit balance of 1,000 in the Goods Sent on Consignment a/c. The Goods Sent on Consignment a/c is closed, at the end of the accounting period, by transferring its balance to the Trading a/c.

  This would result in a net debit of 1,000 to the Trading account, a nominal account, indicating a loss.

  The Trading a/c is taking the charge of 1,000 direct expenses incurred on the goods consigned.

• Returns recorded at their cost

  Consider the returns to be recorded at their cost i.e. 10,000.

  Goods sent on Consignment a/c To Consignment a/c	Dr	10,000	10,000
  [For the value of goods returned]

  Consignment a/c

  Dr Cr
  Date	Particulars	Amount	Date	Particulars	Amount
  15/06/_5 15/06/_5	To Goods sent on Consignment To Cash	10,000 1,000	18/06/_5 30/06/_5	By Goods sent on Consignment By Balance c/d	10,000 1,000
  		11,000			11,000
  01/07/_5	To Balance b/d	1,000

  Goods sent on Consignment a/c

  Dr Cr
  Date	Particulars	Amount	Date	Particulars	Amount
  18/06/_5	To Trading	10,000	15/06/_5	By Consignment	10,000
  		10,000			10,000

  Expense charged to Consignment a/c

  The Consignment a/c is left with a debit balance of 1,000 which is the charge it takes on account of the direct expenses incurred on the goods consigned.

Who should bear the charge?

The 1,000 charge being borne by the Trading a/c or the Consignment a/c is on account of the direct expenditure incurred in relation to goods consigned.

Where it has to be treated as an expenditure or a loss, it should be the Consignment a/c taking the charge and not the Trading a/c, as it is in no way related to the trading activity.

Where the goods are sold, the expenditure incurred is realised through sales. Since, the goods are returned, the expenditure cannot be recovered through sales.

If the expenditure is considered a loss, then the Consignment a/c should absorb the loss, if it is considered a normal loss. Otherwise, the loss has to be moved from the Consignment a/c to the profit and loss account as an abnormal natured loss.

Since return of goods is normal in business, it would be appropriate to consider the loss as normal and let the Consignment a/c take the charge.

Thus, it is appropriate to record the returns of stocks at their cost.

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

The consignee does not record the value of goods at the time of their receipt in his books of accounts.

Thus, the consignee is not required to record the value of goods returned in his books of accounts.