A consignment may be defined as goods delivered by the party of the first part to the party of the second part for the purpose of sale by the party of the second part for account of the party of the first part. The party of the first part is known as the consignor. The party of the second part is known as the consignee. In dealing with the subject it must be looked at from two points of view, first, that of the consignee and, second, that of the consignor.
In treating the subject of consignments from the point of view of the consignee there must be considered the consignment invoices, the books to be kept, the procedure which the accounting follows and the manner of showing the accounts both on the books of the consignee and upon the balance sheet. All of these will depend upon several things.
A consignment invoice will at times take two distinct forms, depending largely on whether or not the sales prices of the goods have been agreed upon by the two parties. If there has been no agreement as to the sales prices it is probable that the goods will be invoiced as so many units without any accompanying price and consequently without any value. If there is an agreement as to the prices the invoice may show the prices and the value resulting or it may show merely the quantities without prices and value.
It may be of interest before discussing the subject further to trace an invoice of consigned goods from the time of their receipt until such time as they are sold and accounted for. Upon receipt of the goods there is the possibility that the consignee will be obliged to pay certain charges for freight, insurance, cartage and possibly duty. Whether these charges are to be borne by the consignee or the consignor will depend upon the contract between the two parties and would seem unimportant to the discussion at this moment. The goods will be put in stock and subsequently sold. In connection with their sale there may be expenses such as outward cartage and freight, trade discount, allowances and in some cases cash discount. At the end of the month or at some intervening date the consignee will render to the consignor an account for the goods sold, which is technically known as an account sales. Such an account will show the gross sales less the charges or expenses which are to be borne by the consignor, together with a further deduction which has been agreed upon for the commission to the consignee, and as a balance closing the statement the amount which the consignor is entitled to receive.
Two main questions are presented. The first one is whether cognizance shall be taken in the accounting, of the consigned goods from the time they were received. The second one is whether no attention shall be given to the goods so far as their effect upon the general accounts is concerned until such time as they have been sold and accounted for. In discussing the first question the invoice will have to be taken into consideration. The procedure is somewhat simplified if the consignment invoice shows the price at which the goods are to be sold. It becomes more difficult if no prices are given in the invoice. In such an event prices must be placed upon the goods in order to establish a basis for the accounting. These must needs be arbitrary figures because of the reason that where prices are not shown there is the possibility that the goods will not be sold at fixed prices and the price may vary in accordance with the extent to which competition exists in the trading.
To illustrate this point a consignment of motor cycles may be received without any price being shown on the invoice. The understanding may be that they are to be sold for $250, with, however, the qualification that they may be sold for more or less. To take them up at time of receipt means that they must be priced at $250 and carried in the accounts at such figure. If perchance they are not sold at $250 then the original pricing must be adjusted and the corresponding accounts affected also adjusted. If, however, the price is fixed and the consignee has no discretion in selling the goods this difficulty is overcome. To summarize briefly the foregoing and to afford a basis for further discussion it may be said then, that goods received on consignment may be taken up at the time of receipt or at the time of accounting regardless of whether prices are or are not shown on the invoice and that if not shown the goods must be temporarily priced at a figure which may or may not require adjustment in accordance with the agreement by the two parties.
The question of books will depend largely on whether the goods are to be taken up at time of receipt or at time of sale. To illustrate the procedure in these two cases, let the following be considered: first, as to goods taken up in the general books at the time of their receipt. The invoice may be considered as covering ten motor cycles priced at $250, with the value of $2,500 attached. The bookkeeping operation will consist in charging an account called consignments or consignments received and crediting an account with the consignor. This process would not differ from the treatment of the ordinary purchase invoice except that the credit account should be designated in some way to show that it is not a liability account. The invoice would be entered in the purchase journal or voucher record. If controlling accounts are kept the credits to consignors should be entered in a separate credit column or marked in some way for the purpose of facilitating their elimination at the end of the month from the total column in order that such amounts will not be included in the credit to the controlling account for accounts payable. Where consignments are numerous they will usually be put through the purchase journal or voucher record. If they occur infrequently they may be taken up through the general journal charging consignments and crediting the individual account with the consignor.
Next would come any charges for inward freight, cartage or insurance. As before stated these charges may be stood by the consignor or consignee depending upon the contract, but presumably by the consignor. In the instance in hand let it be assumed that such charges amount to $20. The consignee upon paying these charges or upon taking up a liability for them would instead of charging his own freight and cartage account charge an account called “freight, cartage, etc., on consignments.”
Upon the sale of the goods the consignee would issue a sales invoice to his customer. The customer would be charged, but instead of the amount corresponding to the invoice being credited to the general sales account of the consignee it would be credited to the asset account for consignments. In concerns where a mixed business is conducted the sales of consigned goods are segregated from the sales of owned goods by having a separate column for same in the sales book.
It might be assumed in this instance that the motor cycles were sold for $2,500, the fixed price. The terms to the customer might provide for a trade discount of 10% and a further discount of 2% from the net amount for cash in 10 days. The trade discount would amount to $250. The cash discount will be determined later. It might also occur that the customer would make a claim for allowance of $10 for certain defects in one of the wheels and $15 for freight which he had paid on account of the wheels having been shipped to him collect. Assuming these allowances to be made the customer will without question have to be credited in corresponding amounts and the accounts to be charged when the customer is credited will depend upon the terms of the contract as to whether the charges are to be sustained by the consignee or consignor. Since the consignee is acting purely in the capacity of an agent transacting business for the consignor in return for a commission it is probable in most cases that the charges will be sustained by the consignor. Thus the item charges mentioned would be charged respectively to allowances on consignments and delivery charges on consignments. If the reverse conditions existed these items would be charged to the respective general accounts of the consignee and would affect his expense of doing business.
Looking at the customer’s account it would be seen that it was charged with $2,500 and credited with three items, namely, $250 for trade discount, $10 for allowances on account of defective goods and $15 for delivery charges. The net debit balance in the account would be $2,225, which if subject to a cash discount of 2%, would be further reduced in the amount of $44.50.
Up to this point the account with a consignor has not been affected since the original credit of $2,500. This amount represents the gross figure which must be accounted for to the consignor by the consignee. The goods having been sold the agent is now liable to his principal for the proceeds of sale. In order to determine the extent of this liability the consignor’s account must be adjusted by the various charges for freight, discount, allowances, etc., and the commission which the agent is entitled to for his services in selling the goods. The commission is probably without exception figured on the gross selling price, which may have been predetermined or fixed by the actual sale. If in this case the agent is to receive a commission of 5%, such commission would amount to $125.
In attempting to determine the liability to the consignor’s several accounts, which are in the nature of offsets to the $2,500 originally credited to the consignor’s account, must be closed out and charged against it. These items are inward freight on consignments $20, trade discount $250, allowances for defective goods $10, delivery charges $15, cash discount $44.50. The consignor’s account would also further be subject to a charge of $125 for commission. It is to be borne in mind that when this commission is computed and charged against the consignor a commission earned account will be credited with $125. This as will be seen later constitutes the agent’s earning or income in connection with the transactions. The customer’s account will presumably have been closed by a credit of $2,180.50, which will have been charged to the agent’s cash account when credited to the customer.
If we may look now at the consignor’s account we shall find it credited with $2,500 and charged with several items aggregating $464.50; a net balance of $2,035.50. This amount represents the liability of the agent to his principal, and its treatment at this point may be considered for a moment from a purely technical point of view. Originally it existed as an accountability. It has now been transformed into a liability and the question to be decided is whether or not the balance of $2,035.50 shall be allowed to stand in the account and the account closed by a charge in a similar amount when the cash is paid over to the consignor, or whether the account shall be closed by a charge of $2,035.50, transferring the balance to a liability for accounts payable. Technically the latter method is the more correct. Practically the first mentioned method may be more convenient and no objection can reasonably be raised to its use where the transactions pertaining to the consignment are complete. An objection to this method does arise, however, where the transactions are not complete or where a partial accounting for goods sold becomes necessary. It will probably be apparent where such conditions exist that the balance in the account represents a mixed situation, namely, one of accountability and one of liability. Where this occurs there will probably be no question about the desirability of transferring the completed portion to a liability account and closing same out subsequently through a debit at the time the cash is paid.
If we are now to go back for a moment and look at the accounts we shall find a debit balance of $2,180.50 in the cash account representing the cash received from customers and credit balances in the consignor’s account and the commissions earned account, amounting respectively to $2,035.50 and $125. If now settlement is had with the consignor he will receive a check for $2,035.50, thus closing his account and there will be a corresponding credit to the cash of $2,035.50 resulting in a debit balance in the latter account of $145. At this point two accounts pertaining to these transactions will be open, namely, cash and commissions earned. To analyze the balance in the cash account of $145 it is found to be made. up of two items, one of $125 representing the commission earned by the agent and $20 representing the amount advanced by the agent on account of inward freight and for which he has been reimbursed by a deduction in settlement with the consignor.
It sometimes happens where there are numerous accounts with the consignors and partial settlements are made, that the accounts with the consignors are allowed to reflect both the accountability and the liability until the books are closed, when such portions of the accounts as are ready for settlement are taken out of the consignors accounts and transferred to corresponding liability accounts. This facilitates somewhat the preparation of the financial statements in that it makes it possible to show on the balance sheet the distinction between accountabilities and liabilities.
In the case of consignments taken up at the time of receipt where the invoices are not priced, there will be no variation of the above described procedure except in so far as the value at which the consignment is carried. No price being shown on the inventory there are two possible variations which may need to be explained. In the case just illustrated the goods were taken up at $2,500. The two possible variations to be examined are first the assumption that a value of $200 had been placed upon each wheel and second that a value of $275 had been placed upon each wheel. In the first instance the consignment account would have been charged with $2,000 and the consignor’s account credited in a similar amount. Then if it is to be assumed that the wheels were actually sold on a basis of $250 each, or $2,500, there will be seen that two accounts must be adjusted in order to keep the books in balance and make the accounts truthfully record the transactions. Since the consignment account has been charged with only $2,000 and the consignor’s account credited with $2,000 upon sale of the wheels for $2,500, the adjusting entry necessarily would consist in charging the consignment account with $500 and crediting the consignor’s account in an equal amount. If, on the other hand, a value of $275 each had been placed upon the wheels the consignment account would have been charged with $2,750 and the consignor’s account likewise credited. If again these wheels were sold on a basis ofi $2,500, it would be noted that the consignment account as well as the consignor’s account was originally charged and credited respectively with $250 too much and an adjusting entry charging the consignor with $250 and crediting the consignment account with the same amount will consequently be necessary.
The other general proposition concerning the treatment of consignments involves their disposition when they are not taken up until time of sale. Under these circumstances no entry is made in the general or financial books at the time of their receipt. They are carried on a memorandum book or stock record which has nothing whatsoever to do with the financial accounts. They are not considered at all in such accounts until they are sold. The only possibility in connection with them which will require an entry on the general books is when any charges are paid or advances or charges are made against the consignor by the agent. As example of this there may be payments made by the agent for inward or outward freight and cartage or other similar items. Notwithstanding the fact that the agent has made no entry on his books for the consignments, he will of necessity charge the consignor’s account with any such amounts. At the time of sale, or subsequently, an account sales would be made up showing the net proceeds on the consignment exclusive of advances and commissions and the amount of such net proceeds will be credited to the consignor’s account. There will subsequently be made a charge for commission computed as before upon the gross sales price and this amount will be charged to the consignor’s account simultaneously with the credit to the account for commissions earned. The consignor’s account will at this point show the net balance which he is entitled to receive and which will be wiped out by a charge when the cash is paid.
Such is the effect upon the books of the two methods of treating consignments. This whole subject is one upon which accountants generally disagree. It is another instance in which no set rule can be given. The bookkeeping method should be determined largely by the merits of individual cases. At times it will be more convenient and practicable to handle them upon receipt in the memorandum form. At other times circumstances will dictate that they be taken up in the books at the time of their receipt.
Regardless of the bookkeeping there is still a subject which causes considerable discussion, namely, that of the manner in which the subject shall be shown on the balance sheet. If the consignments are not taken up until time of sale there can of course be no possibility of any discussion arising for the reason that if they have been sold the liability becomes evident and is properly included among the accounts payable in the balance sheet. If perchance they have been taken up at time of receipt and all have been sold at the date of the balance sheet, the same thing will be true since there will be the same liability as in the preceding case. The condition which causes the trouble is that there are goods remaining on hand at the time of preparing the balance sheet. Some accountants insist that even though carried on the books they shall not be shown either on the asset or liability side. The supporters of this argument claim that they are neither assets nor liabilities and that the only item in connection with consignments which may ever appear upon the balance sheet in connection with consignments received is a deferred charge against the consignor which may have arisen in connection with advances on account of consignments in which the account-sales has not yet been rendered.
The supporters of another argument hold that a balance sheet is a statement or financial condition taken from the general ledger after the books have been closed. If the ledger shows a debit for consignments and a credit for consignors they maintain that these items must be shown on the balance sheet in order to have this statement agree with the books. They argue further that such purpose is accomplished by showing the items on the balance sheet and there can be no possible objection to it so long as they are ear-marked as contras and not made to represent either assets or liabilities.
It is probable that in most cases it will be found more convenient to carry them on memorandum and not include them in the general books. It is probably also more correct from a technical point of view to exclude them from the balance sheet upon the theory that they are neither assets nor liabilities of the concern whose balance sheet is exhibited and that they are carried on the general books merely as a matter of convenience and the proper control of the accounts.
The other instance in which the question of consignments arises is that where goods are shipped on consignment instead of being received. This question can be settled with facility by dividing it for discussion into two parts, namely, cases wherein goods are invoiced at specific prices and where they are shipped only on memorandum. Where they are invoiced at a price the effect upon the accounts must be looked into. Here the invoices will take the form of any other invoice for goods actually sold. The goods will be charged to the consignee, but they must not be credited to the sales account, for the reason that a sale has not actually taken place and it would be anticipating profits to include such invoices in the sales account. Upon being charged to the consignee they should be credited to a consignment sales account. This is frequently made possible by using a separate column in the sales book for such items. They are thus credited to a consigned sales account which is in the nature of a deferred credit to income. They must not, however, be taken into income until such time as they are sold.
In treating them in this manner there must be taken out of the cost of the goods actually sold, an item representing the cost of goods shipped on consignment. In a case where the consignment sales value is for example $2,500, and the cost of such goods $2,000, the following entry will serve: Consignee:
To Consigned Sales $2,500
Cost of goods consigned:
To Cost of goods sold $2,000
Upon the sale of the goods and the subsequent report of the consignee in the form of an account-sales the matter will have to be adjusted. If we may assume that the consignee is entitled to deductions covering freight and other charges and commission amounting to $300 then the entry will be as follows:
The account for consigned sales will have been reduced by a debit of $300 and may thereafter be released from its deferred status and closed out to the sales. Thus it will be seen that merged in the sales for the period there will be an item of $2,200 and merged in the cost of the sale there will be an item of $2,000. Thus merging in the gross profit on sales for the period an item of $200.
It is sometimes found desirable instead of merging these items with general sales and cost of sales of the company to close such portions of the consigned sales account and corresponding cost of consigned goods sold into a separate trading account for consigned sales in order to show the profit on such transactions separately from the general sales transactions of the company. This is done usually for statistical purposes in cases where it is desirable to ascertain whether or not it is more profitable to sell goods through agents than to establish branches for the conduct of such business.
If the invoices for consignments shipped are not priced at time of shipment and charged to the agent the manner of handling them becomes very much simplified. There are two distinct ways of doing this. One is to ignore entirely the matter of charging agents from the general books and merely taking up the net proceeds as sales when the account sales is received. This of course accomplishes the desired result, but it leaves no trace on the books of the goods themselves. When cash is received sales are credited. The corresponding cost of these sales will of course be merged in the cost of goods sold. The other method is to credit the purchase account and charge a consignee’s account with the cost of goods or the estimated cost at time of shipment and upon receipt of the sales report, at which time sales are credited to make the necessary transfer from the consignee’s account to the cost of goods sold.
Accounting, Practice and Procedure, Dickinson, pages 133-143.
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