Consignment for CMA Foundation: Chapter Guide

What this chapter covers

Consignment: topics in the order to study them

1. 1Consignment Basics and Key TermsYou need the meaning of consignor, consignee, proforma invoice, account sales and del credere before any entry makes sense.
2. 2Consignment Accounting Entries and Ledger AccountsOnce terms are clear, learn how goods sent, expenses and sales are recorded, and how the Consignment Account is prepared.
3. 3Valuation of Stock and Treatment of ExpensesClosing stock and the split between direct and indirect expenses change the profit, so this comes after the basic entries.
4. 4Invoicing Goods at Higher Price and Stock ReserveThis is the hardest part, and it needs you to be comfortable with normal consignment entries and stock valuation first.
5. 5Commission and Consignee Account StatementsCommission types and the consignee's account tie the whole chapter together, so finish with these and practise mixed questions.

How to prepare Consignment

1. Read the key terms once and write each in one line of your own words, especially consignor, consignee, del credere and account sales.
2. Learn the format of the Consignment Account. Debit side: goods sent, consignor's expenses, consignee's expenses, commission. Credit side: sales and closing stock.
3. Solve five simple questions with no loss and no invoice price loading. Focus on getting closing stock and profit right.
4. Practise stock valuation. Add a fair share of direct expenses to the cost of unsold goods, and leave out selling expenses.
5. Do the invoice price questions separately. Learn to remove the loading from goods sent and from closing stock, then adjust the stock reserve.
6. Practise commission types: ordinary, over-riding and del credere. Note the base on which each is calculated.
7. Finish with timed MCQs. Give about a minute and a half to each, and learn to estimate the answer and eliminate options that cannot be right.

Common mistakes in Consignment

• Treating goods sent as a sale and crediting the Sales Account.

  Fix: Remember that no sale occurs until the consignee sells to a customer. Use the Goods Sent on Consignment Account.

• Including selling expenses in the value of closing stock.

  Fix: Add only expenses that bring goods to the point of sale, such as freight and insurance in transit. Leave out selling costs.

• Treating the consignee's expenses wrongly when valuing stock.

  Fix: Read each expense and ask when it was incurred. Expenses up to the point the goods reach the consignee's godown (such as carriage, octroi and unloading) are direct expenses and are included in stock cost. Expenses after that point (such as godown rent, advertising and salesman's salary) are indirect and are excluded.

• Leaving the invoice price loading in stock and in goods sent.

  Fix: Reduce goods sent and closing stock to cost first. Then find the profit and adjust the stock reserve.

• Calculating commission on the wrong base.

  Fix: Underline the base in the question. If commission is a percentage of the amount after deducting commission (net proceeds), use: commission = Sales × C ÷ (100 + C), where C is the commission rate. For example, at 10% on net proceeds with sales of ₹1,10,000, commission = 1,10,000 × 10 ÷ 110 = ₹10,000.

• Counting abnormal loss as part of the normal cost of stock.

  Fix: Normal loss is spread over the good units. Abnormal loss is valued separately and credited to the Consignment Account.

Last-day revision: Consignment

• ✓Consignment is not a sale. Ownership stays with the consignor until the consignee sells the goods.
• ✓Consignor is the owner. Consignee is the agent who sells and earns commission.
• ✓Profit or loss on consignment is found in the Consignment Account.
• ✓Goods sent may be recorded at invoice price in the books, but the loading is then removed from the Consignment Account (by crediting the loading adjustment) so that the account shows cost.
• ✓Expenses up to the point of reaching the consignee's godown are direct expenses and are added to stock cost.
• ✓Selling and distribution expenses are not included in stock valuation.
• ✓Closing stock is valued at cost plus a proportionate share of direct expenses, or at net realisable value if that is lower.
• ✓Normal loss is absorbed in cost. Abnormal loss is valued like stock (cost plus proportionate direct expenses up to the point of loss) and credited to the Consignment Account. Any insurance claim admitted is deducted from the Abnormal Loss Account, and only the balance is transferred to the Profit and Loss Account.
• ✓Del credere commission covers the risk of bad debts, so the consignee bears that loss.
• ✓Over-riding commission is an extra commission, over and above ordinary commission, paid to encourage the consignee to sell at higher prices or to push new products and develop new markets. It is usually calculated on total sales or on the excess over the invoice price, as the question specifies.
• ✓Stock reserve equals the loading in unsold stock and is removed when working out true profit.
• ✓Always check whether the commission is on total sales, on net proceeds, or on invoice price.

Consignment practice questions

• Ravi Traders consigned goods to Mohan & Co. Mohan sold goods for Rs 2,40,000 (all cash). The agreed commission is 5% on sales. Mohan also ge…
• Nair Exports consigned 600 units costing Rs 100 each to Iyer & Co. Nair spent Rs 6,000 on freight. Iyer incurred Rs 3,000 on carriage inward…
• Kavya Textiles consigned 400 units costing ₹150 per unit. It paid ₹8,000 as freight and insurance. The consignee paid ₹4,000 for unloading a…
• In the books of the consignor, which entry records the commission earned by the consignee on goods sold on consignment?
• A consignor sends goods costing Rs 60,000 to a consignee and spends Rs 4,000 on packing and forwarding. The consignee spends Rs 2,000 on god…
• In consignment accounts, the closing stock lying unsold with the consignee is valued at which of the following?
• Which statement about the Account Sales sent by a consignee to the consignor is correct?
• Which statement about an account sales is correct?

Consignment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• CMA IntermediateConsignment