Consignment Accounting for CMA Inter Financial Accounting

What this chapter covers

Consignment: topics in the order to study them

1. 1Consignment Basics and Key TermsYou need the vocabulary and the idea that ownership stays with the consignor before any entry makes sense.
2. 2Accounting Treatment in Books of Consignor and ConsigneeThis gives you the core Consignment Account and the consignee's side, which every later topic builds on.
3. 3Valuation of Unsold Stock and Invoice Price MethodClosing stock decides profit, so learn its valuation and the loading adjustment once the basic account is clear.
4. 4Normal and Abnormal Loss in ConsignmentLoss treatment changes stock value and needs the valuation rules you just learned.
5. 5Commission, Del Credere and Overriding CommissionCommission types add to the consignee's side and work best after the main account is solid.
6. 6Special Cases: Goods Sold Below Cost and ReturnsThese are variations on everything above, so attempt them last and combine the earlier steps.

How to prepare Consignment

1. Read the terms once and write a one-line meaning for each: consignor, consignee, proforma invoice, Account Sales, del credere commission, overriding commission.
2. Draw the Consignment Account format from memory. Practise a simple question with no stock, no loss and a fixed commission until it is automatic.
3. Learn which expenses go into the cost of goods: only non-recurring expenses up to the point of getting goods to the consignee's godown, such as freight, cartage and insurance in transit. Learn which are recurring selling expenses, such as godown rent, and are not added to stock value.
4. Add closing stock. Practise computing stock at cost plus a proportionate share of the direct expenses.
5. Add loss questions. Separate normal loss from abnormal loss. For abnormal loss, compute its value (cost plus proportionate direct expenses) and pass this entry: Abnormal Loss A/c Dr, to Consignment A/c (value of the loss). Then check the insurance position. If the goods are insured and the insurer admits a claim, pass Insurance Claim A/c Dr (only the amount admitted) and Profit and Loss A/c Dr (the balance), to Abnormal Loss A/c. If the goods are uninsured or the claim is not admitted, debit the full abnormal loss to Profit and Loss A/c, to Abnormal Loss A/c.
6. Solve one question with commission variants, then one with invoice price and goods sent at loading. Write each working note separately for step marks.
7. Finish with a timed question mixing everything, then attempt MCQs on definitions and stock value.

Common mistakes in Consignment

• Adding all expenses to the cost of stock

  Fix: Include only non-recurring expenses incurred up to the consignee's godown, such as freight, cartage and insurance in transit, in closing stock value. Recurring selling expenses such as godown rent go only to the Consignment Account.

• Treating normal loss like abnormal loss

  Fix: Ask if the loss is inevitable. If yes, it is normal and just raises the per-unit cost. If not, it is abnormal and is valued and removed from the account.

• Forgetting the proportion when valuing stock or loss

  Fix: Multiply the direct expenses by the fraction of units unsold or lost, then add to cost.

• Wrong commission base

  Fix: Underline the commission clause and write the base as a working note before calculating.

• Not removing the loading under the invoice price method

  Fix: Reduce Goods Sent on Consignment by the loading. Create a Stock Reserve only for the loading on unsold stock (opening and closing). Take abnormal loss at cost, that is invoice value less loading plus its share of direct expenses, and adjust its loading through the Goods Sent on Consignment account and the Consignment Account, not through Stock Reserve.

• Skipping working notes

  Fix: Write short notes for stock, loss and commission. They earn step marks and make errors easy to trace.

Last-day revision: Consignment

• ✓In consignment, goods remain the consignor's property until the consignee sells them.
• ✓The consignor sends a proforma invoice, which is not a sales invoice.
• ✓The consignee sends an Account Sales showing sales, expenses, commission and amount due.
• ✓Profit is recognised only on sale by the consignee, not on dispatch.
• ✓Closing stock is valued at cost plus the non-recurring direct expenses up to the consignee's godown, on a proportionate basis. Recurring expenses such as godown rent are excluded.
• ✓Normal loss is absorbed in the cost of the remaining goods, so the unit cost rises.
• ✓Abnormal loss is valued at cost plus proportionate direct expenses and shown separately, not in stock.
• ✓For abnormal loss, pass Abnormal Loss A/c Dr, to Consignment A/c (value of the loss). If the insurer admits a claim, pass Insurance Claim A/c Dr (admitted amount only) and Profit and Loss A/c Dr (balance), to Abnormal Loss A/c. If the goods are uninsured or the claim is not admitted, debit the full abnormal loss to Profit and Loss A/c.
• ✓Del credere commission compensates the consignee for bad debts, and the consignee bears them.
• ✓Overriding commission is an additional commission given to encourage the consignee to sell at higher prices. Its base, either total sales or the excess of sale price over invoice price, is stated in the question.
• ✓Under the invoice price method, the loading is removed from goods sent on consignment (reduced from the Goods Sent on Consignment account) and from opening and closing unsold stock (through Stock Reserve), so that profit is shown on a cost basis. Abnormal loss is taken at cost (invoice value less loading), and its loading is adjusted through the Goods Sent on Consignment account and the Consignment Account. Stock Reserve applies only to unsold stock.
• ✓Keep the commission base clear: some questions pay it on total sales, others on credit sales.

Consignment practice questions

• Kapoor Ltd. consigned 500 units costing Rs 200 each to Sen Brothers. The consignor paid Rs 10,000 freight and insurance. On the way, 50 unit…
• Which statement about abnormal loss on consigned goods is correct?
• A consignee is entitled to 6% commission on sales. Total sales were Rs 2,50,000, including Rs 50,000 of credit sales not yet collected at th…
• In the books of a consignor, which of the following correctly describes the Consignment Account?
• In consignment accounts, the main difference between an ordinary commission and a del credere commission paid to a consignee is that the del…
• Nair Exports consigned 1,000 units to Pillai at an invoice of Rs 150 each. Pillai sold 800 units at Rs 200 each, all for cash. Commission is…
• In a consignment arrangement, who owns the goods while they are held by the consignee, unsold?
• Mehra Ltd. consigned 200 units costing Rs 500 each to Nair & Co., and paid Rs 10,000 freight. Nair sold 150 units at Rs 700 each, and paid R…

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 FoundationConsignment
• CA IntermediateProcess & Operation Costing