What do you mean by Consignment Account. Briefly Explain the treatment of Commission, Normal Loss and Abnormal loss Under Consignment Account.
Meaning of Consignment:- It is a business in which one person sends goods to another person for the purpose of sales. Such a transaction is called consignment. The person who sends goods is called Consignor. To whom goods are sent for sales is called consignees. The consignee is not liable to payment of goods consigned until these are sold.
In other words:- It is a type of doing business through another person based on commission. In Which goods are sent to another person with the intention of sales on behalf of the consignor. Such a process is called a consignment account.
CONSIGNEE COMMISSION
It is the remuneration received by the consignee as a reward for the services performed in connection with the selling of goods on behalf of the consignor. Consignee commission are the following types :
( a ) Normal Commission or Ordinary:- This commission is paid to the consignee as a return for the sale of goods by him on behalf of the consignor. Normal commission is normally a fixed percentage of total sales as per terms laid down by the consignor.
( b ) Del Credere Commission:- Such commission is that which is paid by the consignor to the consignee on conditions. When a consignee bears costs of Bad Debts which arises in resulting in credit sales. This commission is an additional commission over the normal commission. Because he guarantees the payment of debtors. So this commission is calculated only on the credit sales.
( c ) Overriding Commission:- It is the extra commission to the additional commission of normal commission. Purpose of This commission is to motivate the consignee to boost the sales of some new product, and Second one reason that the goods are sold by the consignee at the highest possible price. This commission is calculated as a result of selling the goods over and above the minimum sale price fixed by the consignor.
LOSS OF STOCK
IN the consignment goods have to move from one place to another Place. It is natural loss to the goods may take place in the joint venture or in any business. The consignor will bear the such normal loss, but not will bear the consignee. Loss of goods in consignment is of two types:
- ) Normal Loss
- Abnormal Loss
A.) Accounting for Normal Loss:- Normal loss occurs when goods are lost or damaged due to unavoidable or Natural causes such as losses due to Evaporation, Normal Leakage, Spoilage, Breaking, Drying etc. Thus normal loss is unavoidable and arised due to the normal causes or inherent characteristics of the goods. Such normal loss is borne by the good units. Such loss accounting importance will be arised due to the unsold stock being valued. The cost of unsold stock increases due to the normal loss. Following formula is used for calculating the value of unsold stock.
Value of Stock on Consignment = Total Cost of Goods Consigned/Total Quantity Sent-Quantity of Normal Loss × Unsold Quantity
Note:- Normal loss is not shown in the Consignment Account. So there is no need to pass any entry in the books of account.
B.) Accounting of Abnormal Loss:- When loss is occured due to unexpected or unnatural reasons such as by fire, riot, flood, theft, road accident etc. Then such loss is treated as abnormal loss. Such loss may have occurred in the consignee place or in the transit way. However, Abnormal loss can be Avoided. To find the correct profit on the consignment account, Abnormal losses are eliminated from the consignment account. Thus, abnormal losses should be charged to the profit and loss account.
The following are the Accounting treatment for abnormal loss in the books of consignor :
CASE – I WHEN THE GOODS ARE NOT INSURED
( a ) When abnormal loss is incurred
Abnormal loss Account Dr. (Abnormal loss)
To Consignment Account
( b ) Transfer of abnormal loss
Profit & loss Account Dr. (Abnormal loss)
To Abnormal loss Account
CASE – II WHEN THE GOODS ARE INSURED
( a ) When abnormal loss is incurred
Abnormal loss Account Dr. (Abnormal loss)
To Consignment Account
( b ) When insurance company admits the claim
Insurance Company/Insurance Claim Account Dr. ( with Amount of claim admitted )
Profit & Loss Account Dr. ( With unrecovered loss )
To abnormal Loss Account ( Abnormal loss value )
( c ) Receipt of Insurance Claim
Bank Account Dr.
To insurance Company/Insurance Claim Account
Conclusion:- Commission will arise due to rendering sales services by consignee on behalf of the consignor. Such commission may be different types may be set up by the consignor with the consignee. Normal loss is natural and unavoidable loss. Whose no entry will be recorded. But such normal loss will be imposed on the remaining goods. Whose costs will be raised. Abnormal Loss is an unexpected and unnatural loss. Whose journal entry treatment is done as we have done above discussed. Thus, abnormal loss can be decreased with careful attention towards the goods transit one way or goods lying in the stores.
Essential questions of Financial Accounting
Difference between Joint Accounting and Partnership
Distinguish between Normal Loss and Abnormal Loss
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