Consignment Accounting

Consignment accounting is a term used to refer to an arrangement whereby goods are sent by their owner (consignor) to an agent (consignee) who holds and sells the goods on behalf of the owner for a commission. It is important to understand that the agent never owns the goods.

Consignment Accounting Example

Both the owner and the agent maintain their own records, and the consignment accounting will be different for each party. The main points relating to consignment accounting and goods on consignment are best seen by way of an example.

Suppose an consignor (owner) agrees to consign goods to a consignee (agent) to sell by consignment. The consignor will purchase the goods and pay for them to the transported to the consignee. The consignee in return for a commission of 10%, will arrange for the goods to be distributed and sold.

The consignor (owner) has the following transactions relating to the purchase and transfer of the consignment goods:

  • Purchase of goods – 3,000
  • Carriage and freight – 350

and the consignee (agent) has similar transactions relating to the collection, storage and selling of the goods:

  • Import duty – 200
  • Selling expenses – 300
  • Revenue – 7,000

Goods Transferred by the Consignor

Normally the goods will have been purchased together with other purchases and form part of the inventory of the consignor. The consignment accounting journal entry records the transfer of the goods from inventory to a consignment inventory account to indicate that the goods have been consigned to an agent.

Consignor Accounts – Goods transferred by consignor to consignee
Account Debit Credit
Consignment inventory 3,000
Inventory 3,000
Total 3,000 3,000

The consignment inventory accounting journal represents the transfer of inventory from the normal inventory account to a separate consignment inventory account. The inventory is still the property of the consignor, and no entry is made by the consignee.

No entry is made by the consignee.

Consignor pays expenses

The consignor pays the carriage and freight expenses.

Consignor Accounts – Consignor pays expenses
Account Debit Credit
Consignment inventory account 350
Accounts payable 350
Total 350 350

As the expenses relate to the consignment and are a cost of bringing the inventory to its present location and condition, they are debited to the consignment inventory account. The credit entry as usual is either to accounts payable or cash depending on the terms agreed with the supplier.

No entry is made by the consignee.

Consignee Pays Expenses

The consignee pays the import duty (200) and selling expenses (300) on behalf of the consignor.

Consignee Accounts – Consignee pays expenses on behalf of consignor
Account Debit Credit
Consignor Personal Account 500
Accounts payable 500
Total 500 500

The consignee pays expenses on behalf of the consignor so the debit entry is made to the personal account of the consignor representing monies due by the consignor to the consignee. The credit entry as usual is either to accounts payable or cash depending on the terms agreed with the supplier.

No entry is made by the consignor.

Consignee Sells the Goods

The consignee sells the goods on behalf of the consignor. In this example, we will assume for simplicity the goods are sold for cash.

Consignee Accounts – Consignee sells the goods on behalf of consignor
Account Debit Credit
Consignor personal account 7,000
Cash 7,000
Total 7,000 7,000

The agent has sold the goods for cash. The credit entry is to the personal account of the consignor and represents an amount due by the consignee to the consignor as the goods were sold on the their behalf.

No entry is made by the consignor.

Consignee Records Commission

Under the consignment contract agreement the consignee is entitled to a commission of 700 (7,000 x 10%), and makes the following consignment accounting journal entry.

Consignee Accounts – Consignee records commission
Account Debit Credit
Consignor personal account 700
Commission income 700
Total 700 700

The credit entry to the commission income account represents the income earned by the consignee on the consignment sales. The amount is due from the consignor and is therefore posted as a debit to the personal account of the consignor.

No entry is made by the consignor.

Consignee Accounts to the Consignor

The consignee now provides a summary to the consignor of all transactions it has made relating to the consignment. This report is referred to as an Account Sales Report.

Consignment Accounting – Sales Report
Revenue 7,000
Import Duty 200
Selling expenses 300
Commission 700
Net income 5,800

The consignee now pays the balance on the personal account of the consignor (5,800) to the consignor and clears the account with the following journal entry

Consignee Accounts – Consignee pays the consignor
Account Debit Credit
Consignor personal account 5,800
Cash 5,800
Total 5,800 5,800

No entry is made by the consignor.

Consignor Records the Consignment Sales and Expenses

On receipt of the Account Sales Report from the consignee, the consignor completes the consignment accounting by accounting for the sales and expenses with the following bookkeeping entry.

Consignor Accounts – Consignor records details from the account sales report
Account Debit Credit
Revenue 7,000
Consignment inventory (import duty) 200
Selling expenses 300
Commission 700
Cash 5,800
Total 7,000 7,000

It is important to note that the import duty of 200 is debited to the consignment inventory account as it is a cost of bringing the inventory to its current location and condition relating to the entire consignment, and needs to be taken into account when calculating the cost of goods sold in the next step.

The selling and commission expenses relate only to goods which have been sold and can be taken direct to the appropriate expense account.

In this simple example the debit entry to cash represents the remittance from the consignee with the account sales report, had the consignee not sent cash at the same time, the debit entry would have gone to the personal account of the consignee representing monies due (accounts receivable) from the consignee.

No entry is made by the consignee.

Consignor Records the Consignment Cost of Goods Sold

The consignor must now transfer the cost of goods sold from the consignment inventory account to the cost of goods sold account.

Consignor Accounts – Consignor records cost of goods sold
Account Debit Credit
Cost of goods sold 3,550
Consignment inventory account 3,550
Total 3,550 3,550

In this example, as all the inventory has been sold, the total on the consignment inventory account (3,000 inventory, 350 carriage and freight and 200 import duty) is transferred to the cost of goods sold account. Had all the inventory not been sold, then only a proportion of the inventory would be transferred and the balance would represent inventory still held by the consignee.

No entry is made by the consignee.

The net effect of these postings is summarized in the memorandum income statement below.

Consignment Accounting Memorandum Income Statement
Revenue 7,000
Purchases 3,000
Import duty 200
Freight and carriage 350
Cost of goods sold 3,550
Gross margin 3,450
Selling expenses 300
Commission 700
Operating expenses 1,000
Net income 2,450

The 2,450 reflects the profit made by the consignor on this consignment.

Consignment Accounting April 18th, 2017Team

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