Accounting theory and practice, Volume 1 (of 3)

by Roy B. Kester

Advantages of Consignments.—While the practice of consignment trading is not so prevalent now as it was formerly, it still prevails in some lines and under certain conditions. Shippers to the produce market frequently consign their goods to city brokers whom they instruct to take advantage of the prices prevailing in the open market, and in this way they may realize higher prices than when they sell outright to the wholesaler. The consignment shipment has another advantage to the shipper, in that the title to the goods remains vested in him; hence a consignment is safer than a sale on credit to a consignee unless his rating is satisfactory. The practice of consignment trading is of sufficient importance to require a discussion of the accounting principles involved. These will be given first from the viewpoint of the consignor, and then from that of the consignee.

The Consignor’s Entries.—The chief interest of the consignor lies in the net outcome of each sale in order to determine the advantage, if any, of the consignment policy over a straight sale policy. To accomplish this, he must keep a separate account with each consignment, either on the general ledger or on a subsidiary ledger with a total summary account on the general ledger. When the consignor sends the goods, whether they be invoiced at cost, sale, or some other price, entry should not be made direct to his Sales account, for no sale has been made as yet. He has merely placed some of his stock in another market, being still the owner of the goods.

Two Methods of Entering Sales on Consignor’s Books.—There are two ways of recording correctly a consignment on the consignor’s books at the time the goods are sent. According to one method, the goods are transferred from Purchases to another merchandise account, having for its title the word “Consignment,” followed usually by the name of the consignee and the number of the particular consignment made to him, as “Consignment No. 4, J. B. Arscott.” To this account are charged not only the goods at cost price but also all expenses of the transfer, as freight, duty, insurance, etc., the corresponding credits being to Cash or to Purchases as the case may require. This is the only record made, until the account sales is received from the factor. Upon the receipt of the account sales, the Consignment account may either be credited with the net proceeds or be charged with the expenses and credited with the gross sales, as shown in the account sales. If the money is remitted by the factor the Cash account is debited; otherwise the factor’s account is debited for the net proceeds.

The Consignment account is now a true proprietorship account, showing income on the one side and cost of that income on the other side. The difference is either a profit or a loss according as the balance is a credit or a debit. In order readily to distinguish complete consignment transactions from those only partially completed, it is best to close the completed accounts by a transfer of the balance to a “Consignments Profit and Loss” account where it is held until the close of a fiscal period, at which time it is carried to the general profit and loss.

The second method of recording the transaction at the time of sending the consignment is to set up two memorandum accounts, Consignment and Consignment-Out (or Consignment Sales), debiting and crediting these respectively with the invoiced value of the consigned goods. In this case there is no credit to the Purchases account as under the first method given above. Any expenses incurred are charged to the regular expense accounts instead of to the Consignment account. For handling the consignment shipments no special books are required, original entry being in the general journal. If there are many such transactions, however, a special column in the sales journal or a special consignments-out journal is desirable.

Upon receipt of the account sales, the regular sales account is credited either with the net or with the gross proceeds; and the other accounts—as cash, the consignee, and expenses—are debited according to the manner of booking as explained in connection with the first method.

The two memorandum accounts, having served their purpose of calling attention to the fact that some goods have been sent to other markets for sale, should now be canceled by a reversing entry, since the goods have been sold and the record of their sale has been made in the regular sales account. The effect of this second method is to merge consignment and regular sales transactions into one record, making impossible a separate showing of the profit or loss on consignments. The particular method to be used, therefore, will depend upon the information desired.

Consignor’s Inventory.—If the consignor’s fiscal period closes before an account sales in full settlement is received, and if accounting treatment is by the first method, the goods shown in the Consignment account are included in the inventory of goods on hand and so represented in the balance sheet. If the second method is used, the Consignment and Consignment-Out accounts are both omitted from the balance sheet, being merely canceling memorandum entries, and the unsold portion of the consigned goods are included in the inventory. In determining the value of consigned goods, the expenses incurred in sending the goods to the new market may properly be included as a part of the cost.

The Consignee’s Entries—First Method.—Two methods of making entries on the consignee’s books at the time of receipt of goods are used. In the first method, two memorandum accounts, Consignments and Consignments-In, are set up, Consignments being debited for the billed value of the goods received, and Consignments-In being credited for the same item. The purpose of these accounts is merely to set up on the general books a reminder of the transaction.

A third account, John Doe, Principal, is used for current record. This account is charged with the expenses incurred in connection with the consignment and is credited with the sales made therefrom; it is charged also with the consignee’s commission. The balance of the account is, at the completion of the sale, the amount due the consignor, Doe. When this is paid, the account is closed by a debit to John Doe, Principal, and a credit to Cash or Notes Payable. So long as the balance is unpaid, the account, John Doe, Principal, shows the factor’s liability to his principal. This is a special kind of liability, that of a trustee, which is indicated by the inclusion of the word “Principal” in the account title; in case of insolvency a portion of the assets equal to the balance of John Doe, Principal’s account belongs to John Doe and, unless merged beyond possibility of separation, must be so treated. When the sale has been completed, the memorandum accounts, Consignments and Consignments-In, are canceled against each other, having served their purpose.