1. Account Sale
An Account Sale is a periodical statement sent by the consignee to the consignor, providing complete details of goods sold on consignment. It serves as a proof of sales made by the consignee and the amount payable to the consignor. It is an essential document because the consignee acts as an agent, not as a buyer, and therefore must give an accurate record of all transactions relating to consigned goods.
Account Sale usually contains the following details:
- Quantity of goods received and goods sold.
- Selling price of goods sold.
- Expenses incurred by the consignee (recurring expenses such as godown rent, carriage, labour etc.).
- Commission due to the consignee (ordinary, del-credere or overriding commission).
- Any advances paid by the consignee.
- Balance amount payable to the consignor.
It helps consignor prepare the Consignment Account and determine profit or loss. It is a legally significant document used for checking fraud, ensuring transparency, and maintaining proper accounting control between principal and agent.
2. Valuation of Stock (Unsold Goods on Consignment)
Valuation of unsold stock is extremely important in consignment accounting because ownership of goods remains with the consignor. The closing stock must be valued carefully to show true profit. Unsold stock is valued at Cost plus proportionate non-recurring expenses.
Non-recurring expenses include:
- Freight
- Insurance
- Packing
- Custom duty
These expenses are added because they increase the value of goods until they reach the consignee. However, recurring expenses such as godown rent and selling expenses are not included since they are incurred after goods have reached the consignee.
Formula for valuation:
Value of Closing Stock = (Cost of goods × Quantity unsold ÷ Quantity sent) + Proportionate non-recurring expenses
Correct valuation ensures accurate measurement of profit and prevents overstatement or understatement of assets.
3. Non-Recurring / Direct Expenses
Non-recurring expenses are those expenses incurred for bringing goods to a saleable condition and making them ready for consignment. These expenses are directly related to the acquisition or transportation of goods and increase the cost of goods sent on consignment.
Examples:
- Freight charges
- Transportation cost
- Custom duty
- Insurance in transit
- Packing and forwarding charges
These expenses are added to the cost of goods for valuation of closing stock. Since they are one-time costs incurred up to the point goods reach the consignee, they increase the total cost of consignment.
4. Recurring / Indirect Expenses
Recurring expenses are those expenses incurred repeatedly after goods reach the consignee. They do not increase the cost of stock; rather they are treated as selling or administrative expenses incurred on behalf of consignor.
Examples include:
- Godown rent
- Storage charges
- Selling expenses
- Advertisement expenses
- Insurance of godown
These expenses are debited to the Consignment Account but are not considered while valuing closing stock. They reduce the overall profit of the consignment.
5. Procedure of Conversion of Consignment into Joint Venture
Sometimes a consignment arrangement is later converted into a Joint Venture when both parties decide to share profits and losses instead of maintaining a principal-agent relationship. This conversion changes the accounting treatment drastically because the consignee is no longer an agent but becomes a co-venturer.
Procedure:
- Both consignor and consignee agree to convert consignment into a joint venture.
- The unsold goods remaining with the consignee are taken over as Joint Venture Stock.
- Consignment expenses and stock are transferred from Consignment Account to Joint Venture Account.
- Any commission due to consignee ceases, as he becomes a joint venturer.
- Both parties record their share of contribution, sales, purchases, and expenses under the Joint Venture arrangement.
- Profit or loss is shared between them in the agreed ratio.
This conversion is usually done when both parties find the arrangement mutually profitable and want to act as partners for a limited venture without forming a permanent partnership firm.
Additional Explanation
Account Sale (Extended Notes): An account sale is a crucial internal control tool because it ensures that the consignee reports all sales transparently. It prevents manipulation and confirms the accuracy of transactions. It also allows the consignor to verify whether sales were made at authorized prices, whether correct expenses were claimed, and whether commission was properly calculated.
Valuation of Stock (Extended Notes): Correct valuation is essential because consignment stock is shown as an asset in the consignor’s books. Overvaluation inflates profits, while undervaluation reduces profits. Therefore, valuation must always follow the principle of cost or net realizable value whichever is lower. In addition, abnormal loss is valued separately and does not affect the closing stock valuation.
Non-Recurring Expenses (Extended Notes): These expenses are directly attributable to bringing goods into a usable condition. In consignment accounting, these are distributed across the total quantity sent and proportionately added to the cost of unsold stock. This ensures that the closing stock includes all costs incurred up to the point of arrival at consignee’s location.
Recurring Expenses (Extended Notes): These are periodical operating expenses and do not enhance the cost of the product. They have no relation to the physical movement of goods. Their main role is to facilitate storage and selling. In financial accounting, such expenses are written off in the profit determination process.
Conversion into Joint Venture (Extended Notes): When consignment converts into joint venture, the nature of relationship changes from fiduciary agency to a temporary business partnership. All items of consignment account such as goods, expenses, and sales are transferred to the joint venture account. The consignee’s commission is discontinued because the motive shifts from agency reward to profit sharing. This conversion is beneficial when both parties contribute capital, expertise, or intend to share business risks equally.