Introduction
In Financial Accounting, the concepts of consignment and sale appear similar but differ greatly in terms of ownership, risk, accounting treatment and relationship between the parties. A consignment is a special arrangement where goods are sent by the consignor to the consignee to sell on behalf of the consignor, whereas a sale involves transfer of ownership from seller to buyer for a price. The distinction is very important for accurate accounting treatment, preparation of final accounts, valuation of unsold stock, and determination of profit.
Key Differences between Consignment and Sale
| Basis | Consignment | Sale |
|---|---|---|
| 1. Ownership | Ownership of goods remains with the consignor until goods are sold to final customers. | Ownership of goods is immediately transferred to the buyer once the sale is made. |
| 2. Relationship | Relationship is of principal and agent. | Relationship is of buyer and seller. |
| 3. Risk of Loss | Risk remains with consignor until goods are sold. | Risk is transferred to buyer immediately after sale. |
| 4. Consideration | Consignee does not pay immediately; he only gets commission for selling goods. | Buyer pays the sale price to the seller immediately or within credit period. |
| 5. Expenses | Non-recurring expenses (freight, insurance) are borne by consignor; recurring expenses may be reimbursed. | Expenses are normally borne by buyer after delivery. |
| 6. Profit/Loss | Profit belongs to consignor; consignee gets a commission. | Profit on sale belongs entirely to seller. |
| 7. Accounting Books | Consignor prepares a Consignment Account and Consignee Account. | Normal Sales Account and Debtors Account are prepared. |
| 8. Unsold Stock | Unsold stock belongs to consignor and is valued as Closing Stock on Consignment. | No concept of unsold stock once sale is completed. |
| 9. Fixation of Price | Selling price is normally fixed by the consignor. | Selling price is fixed by the seller. |
| 10. Return of Goods | Unsold goods can be returned to consignor. | Goods once sold cannot be returned unless defective. |
Conclusion
Thus, consignment and sale differ fundamentally in ownership, risk, accounting treatment, and nature of relationship. In consignment, the consignee only acts as an agent whereas in sale, the buyer becomes the owner. Understanding these differences ensures correct journal entries, valuation of stock, and calculation of true profit in the books of both consignor and consignee.