Lecture Notes ON Consignment Accounting ( Volume 2 OF 2) PDF

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SAMSON OYOO OTUKENE...

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NATIONAL TEACHER’S COLLEGE, UNYAMA DIPLOMA IN EDUCATION, SECONDARY BUISNESS EDUCATION II INTERMEDIATE ACCOUNTING CONSIGNMENT ACCOUNTING LECTURE NOTES FOR ONLINE LEARNING (volume 2 of 2) Accounting for Consignment Business In the Consignment business, the consignor and the consignee keep their own books of accounts separately. This is because the consignor may send goods to many consignees in different locations. At the same time, the consignee may act as agent for many consignors. Therefore, it is appropriate that each of them keeps his own books of accounts separately in order to know profit or loss made on each consignment. Accounting in the Books of the Consignor In order to keep complete record of consignment transactions, the consignor maintains the following accounts: * Consignment to …….. Account * Consignee's Account * Goods sent on consignment Account and The Cash Book

Consignment to ……… Account: A consignment to … account is a nominal account prepared to find out the profit or loss from each consignment. The account is debited with the following:  Cost of goods sent to the Consignee,  Expenses incurred by the consignor and by the consignee on the same consignment,  the commissions due to the consignee. But the same account is credited with the following:  Amount of sales affected  And closing stock, if any. Note: The balance of this account is either profit or loss. If the credit total is more that the debit totals, the difference represents profit. On the other hand, if the debit total is more than the credit total, the difference represents loss on that consignment.

Consignee’s Account Page 1 of 7

The consignor also prepares the personal account in the name of the consignee (Consignee’s Account). The purpose of this account is to ascertain the amount due by the consignee to the consignor. This account is debited with:  The amount of sales effected by the consignee, The same account is credited with:  The amount of any advance received from the consignee  Expenses incurred by the consignee and  Any commissions payable on sales to the consignee. NB: The balance in this account is the amount due by the consignee to the consignor. Goods Sent on Consignment Account This account serves the purpose of monitoring the movement of consigned goods between the Consignor and the Consignee. It is debited with:  Goods that have been sent to the consignee. The same account is credited with:  The value of goods returned by the consignee to the conginor. NB: Any balance is this account is transferred to the Trading Account (Income Statement) of that year in the books of the Consignor. Transactions and their Double Entries in The Consignor’s Books These transactions and their Double entries are summarized in the table below: Double Entries Transactions DEBIT: Consignment to ……. A/c 1 When goods are sent to the consignee CREDIT: Goods Sent on Consignment a/c 2

3

4

5

when expenses for sending goods (by the consignor) are paid e.g transport

DEBIT: Consignment to.. A/c CREDIT Cash/ Bank A/c

DEBIT: Cash / Bank or Bills Receivable A/c (as When advance payments are made by the consignee to the consignor. This can be in cash/ the case may be) CREDIT: Consignee‘s Personal A/c… bank or using Bills of Exchange DEBIT: Bank a/c (with amount received) DEBIT: Discounts a/c (with discounting When Bills received from the consignee is expenses). discounted with the bank CREDIT: Bills Receivable A/c (with full value) DEBIT: Consignment to …a/c When expenses are incurred by consignee in CREDIT: Consignee‘s Personal A/c selling the consigned goods

6

When sales made by the consignee of the consigned goods

DEBIT: Consignee‘s Personal A/c CREDIT: Consignment to …a/c

7

When the consignee’s commission is due

DEBIT: Consignment to …a/c. CREDIT: Consignee‘s Personal A/c

8

When part of the consigned goods are returned by the consignee to the consignor

DEBIT: Goods Sent on Consignment CREDIT: Consignment to …a/c

9

When Bad debts are incurred (where the

No entry for bad debts is to be passed in Page 2 of 7

10

consignee is entitled to del credere commission) When Bad debts are incurred (where the consignee is NOT entitled to del credere commission), the loss on account of bad debts should be borne by the consignor.

When remittance of money is made by the 11 consignee in full settlement of amount 12

Consignor’s books. Such a loss is to be borne by the consignee himself. DEBIT: Consignment to .. A/c CREDIT: Consignee‘s Personal A/c DEBIT: Cash / Bank or Bills Receivable A/c (as the case may be) CREDIT: Consignee‘s Personal A/c

After balancing off the Consignment to ..a/c, there will be Profit or loss on consignment: DEBIT: Consignment to .. A/c (a) If there is Profit on Consignment

(b) If there is Loss on Consignment When making closing entry for goods sent on 13 consignment a/c When determining the value of closing stock/ 14 unsold Stock with the consignee

CREDIT: Profit and loss A /c (Income Statement) with the amount of profit. DEBIT: Profit and loss A /c (Income Statement), with the amount of loss. CREDIT: Consignment to .. A/c DEBIT: Goods Sent on Consignment a/c. CREDIT: Trading A / c (Income Statement) DEBIT: Consignment Stock A/c CREDIT: Consignment to ..A/c

Illustration: 1 Ajulu Stores of Gulu City consigned, on 1st January 2018, 50 cases of goods at Shs 20,000 each to Ribere Traders of Lira City for sale on commission at 10% on gross sales. Ajulu Stores paid Shs 50,000 for packing, freight and insurance. Ribere Traders took delivery of the goods on 11th January 2018, after accepting a 15-day Bill of Exchange for Shs 500,000 and paid Shs 15,000 for carriage. They sold 40 cases of goods Shs 25,000 and balance for Shs 26,000 each. Their sales expenses amounted to Shs 20,000. On 31st January 2018, Ribere Traders forwarded an account sale together with a draft for the balance. Require: To Prepare; (i)

Account sales rendered by Ribere Traders and also

(ii)

Give journal entries in the books of Ajulu Stores

(iii)

Ledger accounts in the books of Ajulu Stores.

Solution Page 3 of 7

(i)

Account Sales

Particulars

Amount(Shs )

Sale Proceeds: 40 cases sold at Shs 25,000 each

1,000,000

10 cases sold at Shs 26,000 each

260,000

Less: Expense: Carriage

1,260,000

15,000 20,000

Sales expenses Commission @ 10%

126,000 (161,000)

Net proceeds

1,099,000

Less: Advance (Bill)

(500,000)

Balance sent by Draft

599,000

(ii) Journal Entries Description 1.

Consignment to Lira City A/c

Dr (Shs) 1,000,000

Cr (Shs) 1,000,000

Goods sent on Consignment A/c (Sent goods on consignment to Ribere Traders, Lira) 2.

Consignment to Lira City A/c

50,000 50,000

Bank A/c (Expenses incurred on the Consignment to Lira City) 3.

Bill receivable A/c

500,000 500,000

Ribere Traders A/c (Advance received from the Agent in the form of Bill of Exch) 5.

Consignment to Lira A/c

35,000 35,000

Ribere Traders A/c (Carriage and sales expenses paid by consignee) 6.

Bank A/c Bills receivable A/c

500,000 500,000

(The bill met/cashed on due date) Page 4 of 7

4.

Ribere Traders A/c

1,260,000

Consignment to Lira City A/c

1,260,000

(Gross sale proceeds as per Account Sales) 7.

126,0000

Consignment to Lira City A/c Ribere Traders A/c

126,0000

(Commission on gross sales payable @ 10% due to consignee) 8.

49,000

Consignment to Lira City A/c

49,000

Profit and Loss A/c (Income Statement) (Transferred profit on consignment to profit and loss A/c) 9.

Bank A/c

599,000

Ribere Traders A/c

599,000

(Amount received in draft along with account sales) Entries in The Books Of Consignee Consignment is not a sale. Hence, the consignee does not treat the consignor as his creditor. The consignee does not make any entry for the goods consigned by the consignor and received by consignee, because the goods do not belong him. Therefore, the following the Ledger Account used for recording Consignment transactions in the books of consignee: 1. Consignor’s Personal Account. 2. Consignment Debtors. 3. Bill Payable Account. 4. Bad Debtors Account. 5. Cash Book.

S

Summary of Accounting Entries in the Books of the Consignee Transaction Entries in the Books

1.

When goods are received from the consignor

No Entry

2.

When expenses are incurred by the consignor

No Entry

3.

Debit: Consignor‘s Personal A/c When advance payment is made by the consignee to the consignor either in cash or Bank Credit: Bank / Cash / Bills Payable A/c Draft of Bill of Exchange Page 5 of 7

4. 5.

6.

7.

8.

When Bill of Exchange is discounted by the No Entry consignor with the bank When Sales of goods are made by the consignee Debit: Cash Book on cash Credit: Consignor’s Personal A/c. When Sales of goods are made by the consignee Debit: Consignment debtors A / c on credit Credit: Consignor’s Personal A/c When expenses are incurred by the consignee during the sale of goods

Debit: Consignor’s Personal A/c

When the Commission is due to the consignee

Debit: Consignor’s Personal A/c

Credit: Cash/ Bank A/c

Credit: Commission Receivable A/c 9.

When return of goods to the consignor takes place 10. When payments are received from debtors

No Entry Debit: Cash/ Bank A/C Credit: Consignment debtors A/C......Cr

Bad debts incurred (a) In case consignee does not get del credere Debit: Consignor’s Personal A/c commission, all bad debts have to be borne by Credit: Consignment debtors A/C the consignor himself. (b) In case del credere commission is paid to the Debit: Bad debts A /c consignee, bad debts are to be borne by him. 11. When the bills payable accepted in favor of the consignor is met/settled on the due date

Credit: Consignment debtors

Debit: Bills Payable A /c Credit: Bank A/c….............................Cr

12. Unsold stock in possession of the consignee

No Entry

13. Profit or loss on consignment

No Entry

Illustration: 1 Ajulu Stores of Gulu City consigned, on 1st January 2018, 50 cases of goods at Shs 20,000 each to Ribere Traders of Lira City for sale on commission at 10% on gross sales. Ajulu Stores paid Shs 50,000 for packing, freight and insurance. Ribere Traders took delivery of the goods on 11th January 2018, after accepting a 15-day Bill of Exchange for Shs 500,000 and paid Shs 15,000 for carriage. They sold 40 cases of goods Shs 25,000 and balance for Shs 26,000 each. Their sales expenses amounted to Shs 20,000. Page 6 of 7

On 31st January 2018, Ribere Traders forwarded an account sale together with a draft for the balance. Require: To Prepare; (i)

Account sales rendered by Ribere Traders and also

(ii)

Give journal entries in the books of Ribere Traders of Lira City

(iii)

Ledger accounts in the books of Ribere Traders of Lira City.

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