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Financial Accounting · Consignment

Consignment: Goods Sold Below Cost, Returns and Advances

Updated 10 October 2026 · Fact-checked

In consignment, the consignee is only an agent, so if he sells below cost, the loss belongs to the consignor and appears in the Consignment Account at actual sale price. Returned goods are credited to the Consignment Account at cost. Goods the consignee takes over are treated as sold to him. Advances and accepted bills adjust his personal account.

Understand Special Cases: Goods Sold Below Cost and Returns

A consignee sells goods on behalf of the consignor. Ownership stays with the consignor until the goods are sold. So every gain or loss on the goods belongs to the consignor. The consignee earns only commission, and that is usually a percentage of sales.

This is why selling below cost is simple in accounting. You do not change the sale price to cost. You record the actual sale price. The shortfall shows up as a lower profit or a loss in the Consignment Account. The consignee still gets his commission on the actual sales, unless the question says otherwise. Selling at cost means no profit on those goods, but commission and expenses still reduce the result.

Returns can happen in two ways. If the consignee sends unsold goods back to the consignor, the consignor credits the Consignment Account with those goods at cost (or at invoice price, if goods were invoiced above cost, with the loading adjusted). He also debits the Goods Sent on Consignment Account to reverse the earlier despatch. If customers return goods to the consignee, the consignee's net sales fall, and the consignor uses net sales in the Consignment Account.

Sometimes the consignee takes over unsold goods himself. Treat this as a sale to the consignee at the agreed price. Credit the Consignment Account and debit his personal account. Commission on goods taken over is payable only if the question says so.

The consignee may also send an advance, or the consignor may draw a bill of exchange on him. These are only ways of settling the amount. They reduce what the consignee owes. They never change the profit on consignment.

Key rules to remember

Loss on goods sold below cost
Loss = (Cost per unit − Selling price per unit) × Units sold
Use cost including proportionate non-recurring expenses such as freight to the consignee's godown. The Consignment Account shows this automatically when you record actual sales.
Commission on sales
Commission = Rate % × Actual sales made by the consignee
Use actual sale value, even if below cost. Do not apply it to goods taken over or returned unless the question says so.
Goods returned by consignee
Dr Goods Sent on Consignment A/c; Cr Consignment A/c (at cost, or invoice price if goods were invoiced above cost)
This reverses the despatch for the returned units. Return freight paid by the consignor is a debit to the Consignment Account.
Goods taken over by consignee
Dr Consignee's A/c; Cr Consignment A/c (at agreed price)
Treated as a sale. It is not closing stock.
Profit or loss on consignment
Credits (sales + goods returned + goods taken over + closing stock) − Debits (goods sent + expenses + commission) before profit
A negative result is a loss. Transfer it to the Profit and Loss Account.
Amount due from consignee
Sales + goods taken over − expenses paid by him − commission − advance − accepted bills
What remains is the cash the consignee must remit.

How to solve Special Cases: Goods Sold Below Cost and Returns questions

Use this order for any question with below-cost sales, returns, takeover, advances or bills.

  1. 1Read the facts and list units: sent, sold, returned, taken over, unsold. The units must add up to the units sent.
  2. 2Find the cost per unit and add proportionate non-recurring expenses (such as freight to godown) to value stock and returns.
  3. 3Record the consignee's actual sales at the real selling price, even if it is below cost. Deduct customer returns to get net sales.
  4. 4Compute commission on the sales base the question names, and add consignee's expenses.
  5. 5Record goods returned to the consignor as a credit at cost, and goods taken over as a credit at the agreed price.
  6. 6Value closing stock at cost plus proportionate non-recurring expenses (or the lower of cost and net realisable value if told).
  7. 7Balance the Consignment Account to find profit or loss. Then write the Consignee's Account: add sales and goods taken over, deduct his expenses, commission, advance and bills accepted, and show the balance due.
  8. 8Pass the closing entries: transfer net Goods Sent on Consignment to Trading Account, and the profit or loss to Profit and Loss Account.

Quickest way: Unit-check, then one column

When to use it: Use when time is short and the question has many facts packed into one paragraph.

  1. Write one line of units: Sent = Sold + Returned + Taken over + Unsold. Check it first.
  2. Compute value for each group of units on one line each.
  3. Fill the Consignment Account from these lines. Add expenses and commission last.
  4. Cross-check the result: profit equals (selling price − cost) on sold and taken-over units, less all expenses and commission.
  5. Use the same figures for the Consignee's Account. Advances and bills only reduce his balance.

Common mistakes in Special Cases: Goods Sold Below Cost and Returns

  • Changing the sale price to cost when goods are sold below cost.

    Students think the consignor must not show a loss on an agent's sale.

    Fix: Always record the actual sale price. The loss is the consignor's and shows in the Consignment Account.

  • Skipping commission because goods were sold at or below cost.

    Students link commission with profit.

    Fix: Commission depends on sales, not profit, unless the question says otherwise. Charge it on actual sales.

  • Treating goods returned by the consignee as closing stock with the consignee.

    Both are unsold goods, so they look alike.

    Fix: Returned goods are back with the consignor. Credit the Consignment Account and debit Goods Sent on Consignment. Only goods still at the consignee's godown are closing stock.

  • Charging commission on goods taken over by the consignee without being told.

    Students treat takeover as an ordinary sale by the consignee.

    Fix: Add commission on goods taken over only if the question says so. Otherwise limit commission to sales he made.

  • Debiting the Consignment Account when a bill of exchange is drawn or an advance is received.

    Students confuse settlement with trading.

    Fix: Bills and advances go through Bills Receivable, Cash or Bank and the Consignee's Account only. They do not change profit.

  • Forgetting that net Goods Sent on Consignment (after returns) goes to the Trading Account.

    Students stop at the Consignment Account.

    Fix: After the return entry, transfer the balance of Goods Sent on Consignment to the Purchases or Trading Account in the closing entries.

Worked examples

Example 1

Anil Textiles, Surat consigned 600 shirts costing ₹300 each to Mehta & Co., Indore. Anil paid freight of ₹6,000. Mehta sold 400 shirts at ₹280 each, incurred selling expenses of ₹3,000 and is entitled to 5% commission on sales. 200 shirts are unsold. Prepare the Consignment Account.

Show the solution
  1. Units check: 600 sent = 400 sold + 200 unsold.
  2. Goods sent at cost: 600 × ₹300 = ₹1,80,000.
  3. Freight per unit: ₹6,000 ÷ 600 = ₹10. Cost per unit with freight = ₹310.
  4. Sales: 400 × ₹280 = ₹1,12,000 (below cost, so recorded as it is).
  5. Commission: 5% × ₹1,12,000 = ₹5,600.
  6. Closing stock: 200 × ₹310 = ₹62,000.
  7. Debit side: goods sent ₹1,80,000 + freight ₹6,000 + consignee's expenses ₹3,000 + commission ₹5,600 = ₹1,94,600.
  8. Credit side: sales ₹1,12,000 + closing stock ₹62,000 = ₹1,74,000.
  9. Balancing figure = ₹1,94,600 − ₹1,74,000 = ₹20,600 loss.
  10. Check: loss on sales (₹310 − ₹280) × 400 = ₹12,000, plus ₹3,000 and ₹5,600 = ₹20,600.

Answer: The Consignment Account shows a loss of ₹20,600, transferred to the Profit and Loss Account. Closing stock is ₹62,000.

Example 2

Verma Brothers, Delhi consigned 1,000 units costing ₹100 each to Kapoor & Sons, Kanpur. Verma drew a bill of ₹60,000 on Kapoor, which he accepted. Kapoor sold 700 units at ₹120 each and returned 100 units to Verma, who paid return freight of ₹500. Kapoor took over the remaining 200 units at ₹105 each. Kapoor's expenses were ₹2,000. Commission is 4% on sales made by Kapoor, and none on goods taken over. Find the profit on consignment and the amount Kapoor must remit.

Show the solution
  1. Units check: 1,000 = 700 sold + 100 returned + 200 taken over.
  2. Bill entry: Dr Bills Receivable ₹60,000; Cr Kapoor & Sons ₹60,000. No effect on profit.
  3. Sales: 700 × ₹120 = ₹84,000.
  4. Goods returned at cost: 100 × ₹100 = ₹10,000. Dr Goods Sent on Consignment; Cr Consignment A/c.
  5. Goods taken over: 200 × ₹105 = ₹21,000. Dr Kapoor & Sons; Cr Consignment A/c.
  6. Commission: 4% × ₹84,000 = ₹3,360.
  7. Debits: goods sent ₹1,00,000 + Kapoor's expenses ₹2,000 + return freight ₹500 + commission ₹3,360 = ₹1,05,860.
  8. Credits: sales ₹84,000 + goods returned ₹10,000 + goods taken over ₹21,000 = ₹1,15,000.
  9. Profit = ₹1,15,000 − ₹1,05,860 = ₹9,140.
  10. Check: profit on 700 units ₹14,000 + on 200 units ₹1,000 = ₹15,000; less ₹2,000, ₹500 and ₹3,360 = ₹9,140.
  11. Kapoor's account: debit sales ₹84,000 + goods taken over ₹21,000 = ₹1,05,000. Credit expenses ₹2,000, commission ₹3,360 and bill ₹60,000 = ₹65,360.
  12. Balance due = ₹1,05,000 − ₹65,360 = ₹39,640.

Answer: Profit on consignment is ₹9,140. Kapoor must remit ₹39,640. Net Goods Sent on Consignment of ₹90,000 goes to the Trading Account.

Exam tips

  • Write the unit check at the top of your answer. It often earns a step mark and prevents missed units.
  • Show every working note: cost per unit, freight per unit, commission, closing stock. Step marks depend on them.
  • Read for words such as 'at cost', 'below invoice price', 'taken over' and 'commission on'. They decide which figures to use.
  • For MCQs, find which account the item hits. Advances and bills never change consignment profit. Below-cost sales reduce it by the actual shortfall.
  • Keep the layout: Consignment Account, then Consignee's Account, then closing entries. Label each clearly.

Practice questions from Consignment

Special Cases: Goods Sold Below Cost and Returns: frequently asked questions

Who bears the loss if the consignee sells goods below cost?

The consignor bears it, because the consignee is only an agent. The loss shows in the Consignment Account through lower sales. The consignee still gets commission unless the question or agreement says otherwise.

How are goods returned by the consignee recorded?

The consignor debits Goods Sent on Consignment Account and credits the Consignment Account at cost. If goods were invoiced above cost, the invoice price is used and the loading is adjusted. Any return freight paid is debited to the Consignment Account.

Does an advance or bill from the consignee change consignment profit?

No. An advance or an accepted bill only settles what the consignee owes. Record it in his personal account along with Cash, Bank or Bills Receivable. Profit depends only on sales, stock, expenses and commission.

How do I treat goods taken over by the consignee?

Treat them as a sale to the consignee at the agreed price. Credit the Consignment Account and debit his personal account. They are not closing stock, and commission applies only if the question says so.