Consignment Accounts: Consignor and Consignee, Valuation of Stock, Commission and Abnormal Loss

Consignment is a special method of selling goods. The owner of goods (consignor) sends goods to an agent (consignee) to sell on his behalf. The ownership remains with the consignor until goods are sold. This topic is commonly asked in exam because it tests:

• conceptual clarity (consignment vs sale)
• understanding of commission, expenses, and stock valuation
• treatment of normal loss and abnormal loss

In numericals, most mistakes happen because students:

• treat consignment like a normal sale,
• forget to include “non‑recurring expenses” in stock valuation,
• confuse normal vs abnormal loss, and
• apply commission on wrong base (gross sales vs net sales).

Meaning of consignment and key features

Consignment means sending goods by the owner (consignor) to an agent (consignee) for sale on behalf of the owner.

Key features:

• ownership remains with consignor until goods are sold
• consignee sells goods as an agent, not as buyer
• consignee earns commission
• consignee may incur selling expenses and gets reimbursement as per agreement

Consignment vs sale (important differences)

Exam hint: This table alone can score full marks in many 3‑mark questions.

Parties: consignor and consignee

• Consignor: owner of goods who sends goods.
• Consignee: agent who receives goods and sells them.

Consignee generally sends periodic statements to consignor showing:

• sales (cash/credit),
• expenses,
• commission, and
• closing stock or loss.

Important documents: proforma invoice and account sales

Proforma invoice

It is a statement sent by consignor to consignee showing details of goods dispatched (quantity, price, packing, etc.). It is not a sale invoice, only information.

Account sales

It is a statement sent by consignee to consignor showing:

• sales made (cash and credit)
• expenses incurred by consignee
• commission due to consignee
• advances/remittances made
• closing stock / loss details

Account sales is the main basis for preparing consignment accounts.

Expenses in consignment: recurring vs non-recurring

Expenses are important because some expenses are included in stock valuation and some are not.

• Non‑recurring (direct) expenses: incurred to bring goods to consignee’s place / make them saleable (freight, carriage inward, insurance, octroi, customs duty, loading/unloading, packing for transport).

  • These are included in stock valuation.

• Recurring (selling) expenses: incurred after goods reach destination, mainly for selling (godown rent, salesmen salary, advertisement, delivery expenses).

  • These are not included in stock valuation (they are period/selling expenses).

Commission: types (ordinary, del credere, overriding)

1. Ordinary commission: basic commission for selling.

2. Del credere commission: extra commission for taking the risk of bad debts on credit sales. If del credere is given, consignee bears the loss of bad debts (unless agreed otherwise).

3. Overriding commission: extra commission for achieving higher selling price / promoting product / additional efforts.

Important: Commission is calculated as per agreement; exam questions often specify “commission on gross sales” or “commission on net sales (after expenses)”—read carefully.

Valuation of consignment stock (unsold stock)

Unsold stock belongs to consignor, so it must be valued and shown as consignment stock.

General rule:

• Stock value = cost of goods + proportionate non‑recurring expenses.

Working idea:

• First find cost per unit.
• Add non‑recurring expenses per unit (apportioned).
• Multiply by units in closing stock.

If normal loss exists, non‑recurring expenses are spread over effective units (units received − normal loss units).

Losses: normal loss vs abnormal loss

Normal loss

• expected, unavoidable, inherent in nature of goods (evaporation, leakage, breakage in transit to some extent).
• generally no separate valuation; it increases cost per unit of good units.

Abnormal loss

• unexpected, avoidable, due to accident/fire/theft or negligence.
• valued separately at cost + proportionate non‑recurring expenses.
• shown separately in consignment accounts.

Abnormal loss: valuation and treatment

Valuation of abnormal loss (basic):

• Abnormal loss value = cost of lost goods + proportionate non‑recurring expenses up to the point of loss.

Treatment:

• debit Abnormal Loss A/c and credit Consignment A/c with value of abnormal loss.
• If insurance claim is received, credit abnormal loss with claim and transfer balance (loss) to P&L.

Stock reserve / loading (when invoice price is used)

Sometimes consignor sends goods at invoice price (cost + profit) to control selling price.

In such cases:

• “Loading” = invoice price − cost price (unrealised profit).
• Closing stock at invoice price must be reduced by loading to show it at cost.
• This reduction is called stock reserve.

Mini tables & flowcharts for exam answers

Table 1: Which expenses go into stock valuation?

Flow: Consignment accounting cycle

Goods sent by consignor → Consignee sells → Consignee sends Account Sales → Calculate expenses/commission/loss → Find closing stock → Profit/Loss on consignment

Mini checklist (exam)

• Identify normal loss? abnormal loss?
• Separate recurring vs non‑recurring expenses
• Compute commission base correctly
• Value closing stock correctly

Quick Recap (1-minute revision)

• Consignment = principal–agent; ownership stays with consignor.
• Account sales is the key statement for accounts.
• Stock valuation includes cost + proportionate non‑recurring expenses.
• Normal loss is inherent; abnormal loss is unexpected and valued separately.
• Commission can be ordinary/del credere/overriding as per agreement.